A bond is a debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. Bonds are sometimes called fixed income securities.
A Bond is an instrument which pays fixed amounts (usually) of interest (called a coupon) on a regular basis, over its life and is redeemed at par value (usually) at maturity, by the issuer .
Corporate bonds, issued by a Corporation, are meant to raise the funds for the company’s expansion plans.
Basic Reasons for Issung Bonds
1. To raise capital for their business for investments
2. To Reduce the Cost of Capital
3. To Effect Tax Saving
4. Long-Term Financing
5. Avoid long-term financing from banks
6. Efficiency of management
7. Lower interest payments
8. No Dilution of Stockholder's Equity
9. Call options by the company
10. Convertibility options by the company
Advantages of Corporate Bond
Offer higher interest:
Corporate bonds generally offer higher interest rate when compared to government bonds as investors run a huge risk in case of company issuing the bonds going default on payments.
Steady income to investors
Corporate bonds provide steady income to investors in the form of coupons / interest rate.
Purchasing Opportunity any Time:
There are many corporate bonds in the market at any point of time, giving the investors a chance to opt for bonds from different sectors.
Selling Opportunity any Time
Corporate bonds have a huge secondary market so investors can sell them to others at higher prices, especially if the company issuing the bond has a good credibility and credit ratings
Disadvantages of Corporate Bond
Corporate bonds, when compared to government bonds, are more risky as the corporate issuing the bond may default on payments.
If a corporate issues a bond that is callable i.e. the bond that can be purchased back by the company issuing it after a particular time period, then the company might re-purchase those bonds from the investors in case the interest rates decline so that it could release new bonds which will provide low interest rate.
So in case the bond investors buy is callable, the investors must ensure that they are compensated appropriately.
Moreover, if the corporate issuing the bond issues more such bonds in the market, their price would decrease affecting the interests of the investors.
In case of inflation, the prices of the bond may decrease again adversely affecting the investors. Changes in taxation policies also affect the benefits from the corporate bonds.