When I evaluate a bond, I picture a timed contract: I lend today, the company repays later, and I receive interest at agreed intervals. That simple frame answers the core question—how do corporate bonds work—without getting lost in jargon.
Each bond has three anchors: face value (often ₹1,000), coupon (the stated interest rate), and maturity (the date principal returns). If a bond carries a 9% coupon, I expect ₹90 a year—usually split into semi-annual payouts—until maturity, when the face value arrives back in my account. The market price moves around that promise. When interest rates rise, new bonds offer higher coupons, so older bonds typically trade cheaper; when rates fall, older higher-coupon bonds look attractive and trade richer. Yield to Maturity (YTM) pulls price and all cash flows into one number so I can compare options fairly.
Credit is where how do corporate bonds work becomes real world. Ratings are a starting signpost, not a guarantee. I look for what stands behind the bond: is it secured by assets, backed by a guarantee, or subordinated to other borrowings? I study covenants, the debenture trustee’s role, and repayment priority. Two bonds with the same coupon can have very different YTMs if one is unsecured or lower in the waterfall. The extra yield is compensation for that specific risk, not a free lunch.
Features can tilt outcomes. Callable bonds allow the issuer to repay early—good for them if rates fall, less ideal for me because reinvestment could be at lower yields. Puttable bonds hand that option to investors. Some issues float with benchmarks, others step up after certain dates. Before I chase a headline YTM, I check whether optionality explains it.
Access is straightforward today. New issues (primary market) are allocated through online applications; listed bonds trade in the secondary market via demat, with interest and redemption credited directly to my bank account. Liquidity, however, is uneven: marquee issuers see tighter spreads and better two-way quotes; smaller names can be thinly traded. I size positions with that in mind and avoid overconcentration.
Investors often weigh direct bonds against corporate bond funds. Funds pool money to build diversified portfolios, smoothing idiosyncratic risk and handling reinvestment. Returns appear through NAV movement and accrual, minus expense ratios. Direct bonds, in contrast, give me defined cash flows and maturity dates—useful for planning—but they require issuer research, monitoring, and a ladder for diversification. For many portfolios, corporate bond funds provide broad exposure, while a curated basket of direct bonds adds predictable income. The two are complements, not rivals.
My working checklist is intentionally simple. First, match tenor to goal; don’t buy a 7-year instrument for a 2-year need. Second, compare YTMs within similar credit buckets; a small pickup does not justify a big credit downgrade. Third, diversify across issuers and maturities so cash flows roll in across years. Fourth, understand taxation and all costs; rules depend on the instrument and holding period, so I verify the latest guidance before committing.
In the end, how do corporate bonds work is less mystery and more method: cash flows you can map, risks you can name, and prices that move for reasons you can explain. Use corporate bond funds for breadth, layer direct bonds for targeted income, and let process—rather than noise—drive decisions. That is the disciplined path to making bonds a steady part of an Indian investor’s toolkit.
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