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types of corporate bonds in India

Corporate bonds are debt securities issued by companies to raise capital for business operations. In India, there are various types of corporate bonds available for investors, each with its unique features and benefits. Let's take a closer look at some of the most common types of corporate bonds in India:
  1. Fixed-Rate Bonds: Fixed-rate bonds are the most common type of corporate bonds in India. As the name suggests, they pay a fixed rate of interest throughout the life of the bond. For example, if a company issues a 5-year fixed-rate bond with an interest rate of 8%, the investor will receive 8% per year for the next 5 years. Fixed-rate bonds are considered low-risk investments as they provide a predictable income stream.

Example: Tata Steel issued a 10-year fixed-rate bond in 2021 with a coupon rate of 7.17%.

  1. Floating-Rate Bonds: Floating-rate bonds have a variable interest rate that is linked to a benchmark rate, such as the MIBOR or the repo rate. The interest rate on these bonds changes over time as the benchmark rate changes. For example, if a company issues a floating-rate bond with a spread of 50 basis points over the MIBOR, and the MIBOR is currently at 6%, the bond will pay an interest rate of 6.5%. Floating-rate bonds are popular among investors who want to mitigate interest rate risk.

Example: Power Finance Corporation issued a 10-year floating-rate bond in 2021 with a spread of 45 basis points over the 3-month MIBOR.

  1. Zero-Coupon Bonds: Zero-coupon bonds are sold at a discount to their face value and do not pay any interest during the life of the bond. Instead, the investor receives a lump sum payout at maturity, which is equal to the face value of the bond. For example, if a company issues a zero-coupon bond with a face value of Rs. 10,000 and a maturity of 5 years, and the bond is sold at a discount of 20%, the investor will pay Rs. 8,000 to purchase the bond and receive Rs. 10,000 at maturity. Zero-coupon bonds are popular with investors who want to lock in a specific rate of return and are willing to forgo current income.

Example: NABARD issued a 10-year zero-coupon bond in 2021 with a face value of Rs. 5,000.

  1. Convertible Bonds: Convertible bonds can be converted into equity shares of the issuing company at a predetermined price and time. Convertible bonds offer the potential for capital appreciation if the company's stock price increases, while also providing downside protection if the stock price falls. For example, if a company issues a convertible bond with a conversion price of Rs. 100 and the current stock price is Rs. 80, the bondholder has the option to convert the bond into equity shares at Rs. 100 per share. Convertible bonds are popular with investors who want to participate in the growth potential of a company but also want some downside protection.

Example: Bharti Airtel issued a 5-year convertible bond in 2021 with a conversion price of Rs. 565 per share.

  1. Callable Bonds: Callable bonds give the issuer the right to redeem the bond before its maturity date. Callable bonds typically offer higher yields than non-callable bonds to compensate investors for the added risk of early redemption. For example, if a company issues a callable bond with a maturity of 10 years, but the issuer has the option to call the bond after 5 years, the investor is exposed to the risk of early redemption. Callable bonds are popular among issuers as they provide flexibility to manage their debt portfolio.

Example: HDFC Bank issued a 10-year callable bond in 2021 with a coupon rate of 6.81%.

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