Quick Overview
Summary: Corporate bonds are debt securities that allow public and private sector companies to raise capital by borrowing from investors in exchange for regular interest payments. This guide explains corporate bonds, their credit ratings, risks, and yields.
- Public and private companies issue corporate bonds
- These companies raise funds from investors through bonds
- Bonds may provide investors with fixed returns, depending on the issuer and structure
- Compared to government bonds, corporate bonds carry a relatively higher risk but potentially offer better returns
Most investors pick traditional fixed deposits because they feel safe and predictable. But once you begin looking for better returns, a natural question comes up: what offers fixed returns but higher income?
Corporate bonds are one such option. They allow you to earn fixed interest while lending money to companies for a defined period.
In this blog, we break down what corporate bonds are, how they work, how to evaluate them, and how you can approach them with confidence.
Understanding Corporate Bonds
Corporate bonds are essentially contracts between companies and investors. The company borrows from the investors for a set period. The investors lend money in exchange for regular interest payments and receive their invested amount (principal) when the bond matures. Since bondholders are creditors of the company, they have a higher priority over equity shareholders in the event of the company liquidating its assets.
Key Features of Corporate Bonds
Investors interested in purchasing or investing in corporate bonds must know the nomenclature associated with them. It can help them understand and calculate expected returns and compare different corporate bonds. These include:
Common Bond Terms Every Investor Should Know
- Face value: Also called par value, it is the original bond price at which the bond is issued, and the price investors will receive at maturity.
- Coupon rate: It is the fixed annual interest rate that the bond issuer agrees to pay.
- Maturity date: The maturity date is the date on which the bond issuer repays the principal. Corporate bonds reach their maturity date at the end of their tenure.
- Yield to maturity (YTM): It is the total return that the investor can earn if they hold the bond until maturity. It accounts for both interest payments and any capital gains or losses if the bond was bought at a premium or discount to its face value.
Corporate Bond Example
Consider an investor who buys 100 units of a corporate bond issued by ABC Corporation. Each bond has a face value of ₹1,000. This is the principal that the investor will receive from the issuer at maturity. The total investment here for 100 units is ₹100,000. Since the investor purchased the bond at the face value, the principal they can receive at maturity will equal the investment.
The bond offers interest payments at a 10% coupon rate. The investor will get ₹10,000 in interest every year until maturity.
The bond’s maturity date is 3 years from the date of purchase. It’s the bond’s tenure, and ABC Corporation will repay the principal of ₹100,000 after 3 years. It’s in addition to the ₹10,000 annual interest income.
If the investor holds the bond until maturity, the YTM here is the same as the 10% coupon rate because the investor bought the bonds at the face value. If they had purchased at a premium or at a discount, the YTM would vary accordingly.
How Corporate Bonds Work
Companies issue corporate bonds to raise funds without diluting equity ownership. These debt securities allow companies to raise both short-term and long-term capital for projects such as expansion, infrastructure development, refinancing existing debt, or meeting working capital requirements.
The Mechanics of Bond Issuance
Corporate bonds are issued at a specific face value. Their face value can be of three types depending on the issuer’s creditworthiness and market conditions:
1. At par: The bond is issued at its face value (e.g., ₹1,000), meaning the investor pays exactly the stated value and typically earns the coupon rate as the effective return.
2. At a discount: The bond is issued below its face value (e.g., ₹950 for a ₹1,000 bond), so the investor benefits from both interest payments and the gain when the bond is redeemed at full face value.
3. At a premium: The bond is issued above its face value (e.g., ₹1,050 for a ₹1,000 bond), usually because its coupon rate is higher than prevailing market rates, resulting in a lower effective yield for the investor.
Once the bond is issued, investors buy the bond at the face value fixed during the issuance and start receiving the coupon rate (interest rate) specified at the time of purchase. Until maturity, the company pays the coupon payments and returns the invested principal on the maturity date.
Here is how the bond issuance process goes in a nutshell:
- The company that wants to issue the corporate bonds files a prospectus with regulators.
- Investment banks often underwrite these offerings to manage the sale of bonds.
- The issuer determines the interest rate based on market conditions and its creditworthiness.
- After purchasing the bond, the investor starts receiving periodic interest payments based on the bond terms and receives their invested capital at bond maturity.
Primary versus Secondary Market
Corporate bonds are first issued in the primary market through a bond IPO. Once they are listed, investors can buy/sell them in the secondary market. The secondary market provides liquidity, allowing investors to buy or sell before maturity.
Based on changes in interest rates and market conditions, secondary bond rates and bond prices fluctuate. To encourage retail participation, the Securities and Exchange Board of India (SEBI) reduced the minimum investment in corporate bonds to ₹10,000 in 2024.
Types of Corporate Bonds
Different types of corporate bonds are available to generate a passive income. They have different structures that can suit different investors’ needs.
Investment-grade Versus High-yield Corporate Bonds
Investment-grade bonds are bonds that fall in the credit rating range of AAA to BBB-. Bonds that have credit ratings below BBB- are generally known as “Junk Bonds”. While junk bonds offer higher returns than investment-grade bonds, they have a higher risk of default. As per a CRISIL report published in 2025, bonds with BBB- ratings only saw default rates up to 2.21% over a three-year period. Whereas, the default percentage shot up from 9.91% to 52.83% in bonds rated BB+ and below.
Secured Versus Unsecured Corporate Bonds
Secured bonds have collateral backing. Companies can issue secured bonds, which are backed by assets such as equipment or property. These generally carry lower credit risk, but the yields are also lower. Unsecured bonds (debentures) don’t carry any collateral and depend on the issuer’s creditworthiness for repayment. They carry a higher risk but offer higher returns.
Convertible and Callable Corporate Bonds
Convertible bonds offer investors an option to convert their bonds into company equity at predefined terms, such as conversion price/ratio, offering potential upside from equity participation, usually in exchange for lower yields. On the other hand, if the company issues callable bonds, it reserves the right to repay the debt early, usually when interest rates in the market drop.
Zero-coupon and Floating-rate Corporate Bonds
Zero-coupon bonds pay no interest, but they are issued at a discount. For investors, returns come from the price difference between the bond’s face value and its purchase price. A common example is Treasury bills (T-bills), which are short-term government securities issued at a discount and redeemed at face value.
Floating-rate bonds make periodic interest payments, but the interest rate is adjusted based on a benchmark rate (such as Mumbai Interbank Outright Rate (MIBOR), the repo rate, or the National Savings Certificate (NSC) rate.
Credit Ratings and Risk Assessment
The credit ratings of corporate bonds indicate associated default risk and repayment reliability of the bond issuer. A credit rating reflects the probability of whether the issuer can meet its payment obligations on time.
The Role of Credit Rating Agencies
The credit rating agencies assign bond ratings in India. Agencies such as Credit Rating Information Services of India Limited (CRISIL), Investment Information and Credit Rating Agency of India Limited (ICRA), and Credit Analysis and Research Limited (CARE) independently evaluate a company’s ability to pay.
SEBI regulates these credit rating agencies to maintain transparency. Per SEBI mandates, all publicly issued corporate bonds must be rated by at least one registered credit rating agency.
The rating agencies monitor the company’s performance throughout the life of the bond. The bond ratings help investors screen investment bonds. A higher rating generally indicates lower credit risk, which may be associated with lower yields compared to other risky debt securities.
Risk Yield Table for 2026
Here is an indicative table of ratings, risk profiles, and probable yields for investment-grade corporate bonds:
| Rating | Risk Profile | Yield Range |
| AAA/AA+ | Lowest | 7.20% – 8.00% |
| AA/AA- | Low | 8.00% – 9.5% |
| A+/A/A- | Low to Medium | 9.5% – 11.00% |
| BBB+/BBB/BBB- | Medium to High Risk | 11% – 14% |
Note: Yields may vary based on bonds. Also, ratings below BBB- are considered junk bonds, and it is not generally advisable to invest in them.
Let’s understand how risk and yield vary based on the bond rating with an example.
Mr. X invests in a bond with an AAA rating that offers an 8% coupon rate. The company has strong financials and stable cash flows, so its returns stay predictable, though they may be slightly lower.
Mr. Y takes a bond with a BBB rating that offers a 12% coupon rate. The higher yield is attractive, but the company carries moderate financial risk compared to the AAA-rated bond issuer. For Mr. Y, the return potential is higher if the company performs well. There is a higher risk of delayed or missed interest payments.
Therefore, the choice of bond investment has a trade-off. Higher returns usually come with higher risk, and every investor must decide based on their own risk tolerance.
Benefits of Investing in Corporate Bonds
Corporate bonds provide an option to invest in debt securities with higher yields. They offer fixed returns. In many cases, the returns are higher than traditional savings instruments like traditional fixed deposits. Investment in corporate bonds has the following benefits:
Regular Payouts and Higher Returns
Corporate bonds offer regular cash flows through fixed coupon payments, serving as a passive income source. They help with long-term financial goals. The yields and risk vary based on the credit ratings and issuer. Investment-grade corporate bonds with ratings AAA to BBB- have a higher yield compared to government bonds. Generally, investment-grade bonds can offer 8% to 14% per annum.
Portfolio Diversification and Stability
Debt investments, such as corporate bonds, help balance the volatility of equity investments. Bonds move differently from stocks, spreading the risk. The stability of the debt portion offsets the portfolio’s volatility.
Risks Associated with Corporate Bonds
All bonds carry risk, including investment-grade bonds. Some of the risks with corporate bond investments are:
- Default risk: The company may fail to pay interest or principal based on its performance.
- Interest rate risk: Bond prices have an inverse relationship with interest rates. So, increasing interest rates can cause the bond prices to fall.
- Liquidity risk: Some corporate bonds may have lower demand in the secondary market, making it difficult to buy/sell them without price impact.
- Inflation risk: If the coupon rate is lower than the inflation rate, rising inflation costs may erode bond returns.
Comparing Corporate Bonds with Other Assets
Investing in multiple asset classes helps create a balanced portfolio. Here’s how corporate bonds compare with other investments:
| Basis of Comparison | Corporate Bonds | Government Bonds | Stocks | Fixed Deposits |
| Issuer | Public or private companies | Central government | Publicly listed companies | Banks/NBFCs |
| Risk Level | Moderate to high (depends on credit rating) | Low (sovereign backing) | High (market-linked) | Low (insured up to ₹5 lakh under DICGC) |
| Returns | Fixed interest (typically higher than government bonds) | Fixed interest (generally lower than corporate bonds) | Variable (dividends + capital appreciation) | Fixed interest (often lower than corporate bonds) |
| Volatility | Low to moderate | Low | High | Very low |
| Income Type | Regular coupon payments | Regular interest payments | Dividends (not guaranteed) + price gains | Fixed interest payouts |
| Capital Safety | Depends on the issuer’s creditworthiness | High | No capital protection | High (within insurance limits) |
| Liquidity | Moderate (varies by bond) | High (for G-Secs) | Very high | Low (due to lock-in/penalties) |
| Priority in Bankruptcy | Paid before shareholders | Sovereign guarantee (no typical bankruptcy risk) | Paid last | Not applicable |
Corporate Bonds Versus Government Bonds
- Government bonds offer better capital safety due to a sovereign guarantee
- Corporate bonds typically offer higher returns with a higher risk, based on the issuers
- Government securities generally have higher liquidity in the secondary market
Corporate Bonds Versus Stocks
- Corporate bonds provide fixed returns compared to stocks
- Bondholders have a higher repayment priority than stock owners
- Stocks show better capital appreciation potential than bonds
- Stocks experience wider price swings compared to bonds
Corporate Bonds Versus Fixed Deposits
- Corporate bonds generally offer higher returns than fixed deposits
- Corporate bonds offer better liquidity through secondary markets
- Bank FDs provide deposit insurance of up to ₹5 lakh, which adds safety for small investors
- FDs are more suited for risk-averse investors
Taxation of Corporate Bonds in India
Interest income and capital gains from corporate bonds are taxable. In some cases, TDS is also applicable.
TDS and Capital Gains Tax Rules
The interest income is taxed at the investor’s applicable income tax slab rate. For most of the listed and unlisted bonds, 10% Tax Deducted at Source (TDS) applies to interest income exceeding ₹10,000 as per Section 193. If PAN is not provided, TDS may be 20%. However, some bonds may be exempt from TDS, depending on the structure of the instrument.
When the investor sells listed bonds after holding them for 12 months, they incur long-term capital gains (LTCG), which is taxed at 12.5% without indexation. If they sell corporate bonds after holding them for less than twelve months, short-term capital gains apply.
Short-term capital gains (STCG) are taxed at the investor’s applicable income tax slab rate.
For unlisted bonds under new tax regulations, capital gains always incur STCG (taxation at the slab rate) regardless of the holding period.
How to Buy Corporate Bonds in 2026
Investors can invest in corporate bonds on digital platforms. Here is how it works:
- Open a Demat account with a trading platform for holding the bonds.
- Use an online bond provider platform (OBPP) to browse available bond listings.
- Complete KYC and transfer funds to purchase the bonds.
The Role of Online Bond Provider Platforms
The OBPPs follow SEBI regulations to ensure a safe and convenient investment process. They list investment-grade bonds. Investors can filter these bonds based on personal criteria to help identify the right investment.
Conclusion
Corporate bonds offer a higher yield, but there is a credit risk trade-off. The yield advantage over FDs and government securities is real, but the actual bond yields are issuer-dependent. Highly rated bonds carry a lower risk with lower yield potential. Bonds with an AAA rating behave very differently from an instrument with a BB rating. Within a diversified portfolio, investment-grade corporate bonds serve one function well: steady income at moderate risk.
Discover bonds with potentially higher yields that vary based on the rating and issuer terms.
Jiraaf offers investment-grade corporate bonds from a range of issuers.
