Corporate Bonds 101: A Beginner’s Guide to Investing in Fixed Income

Fixed-income securities are essential for investors seeking stability and predictable returns in their portfolios. Among these, corporate bonds stand out as a popular choice, offering relatively higher yields than government securities while introducing unique risks. As of June 2025, the Indian corporate bond market is poised for significant growth, driven by favorable monetary policies, including a series of repo rate cuts by the Reserve Bank of India (RBI), bringing the rate to 5.50%. These developments, coupled with increasing foreign investment and regulatory reforms, make corporate bonds an attractive option for beginners.

What Are Corporate Bonds?

Corporate bonds are debt instruments issued by corporations to raise capital for purposes such as business expansion, acquisitions, or debt refinancing. When an investor purchases a corporate bond, they lend money to the issuing company, which agrees to pay periodic interest (coupon payments) and return the principal at maturity. Unlike government bonds, which are backed by sovereign credit, corporate bonds carry higher risk due to their dependence on the issuer’s financial health. To compensate, they typically offer higher yields.

Corporate bonds differ from other fixed-income securities, such as government bonds (G-Secs) and bank fixed deposits (FDs). Government bonds are considered low-risk due to government backing but offer lower yields, averaging 6–7% in India in 2025. FDs provide guaranteed returns but often yield less than corporate bonds, with rates around 5–6.5% for major banks. Corporate bonds, with yields ranging from 7–10% depending on credit quality, strike a balance between risk and return.

How Corporate Bonds Work

Corporate bonds are issued with specific characteristics that define their structure and appeal to investors. Understanding these mechanics is crucial for beginners.

Issuance

Corporations issue bonds through public offerings or private placements, often facilitated by investment banks acting as underwriters. Public offerings involve detailed regulatory compliance and are accessible to retail investors, while private placements are typically offered to institutional investors or high-net-worth individuals (HNIs). In 2024, corporate bond issuances in India reached a record 10.67 trillion, a 9% increase from 2023, reflecting robust market activity.

Key Features

• Face Value: The principal amount repaid at maturity, typically 1,000 or multiples thereof.
• Coupon Rate: The annual interest rate paid, expressed as a percentage of the face value. For example, a 7% coupon on a 1,000 bond yields 70 annually.
• Maturity: The date when the principal is repaid, ranging from short-term (1–3 years) to long-term (10+ years).
• Credit Rating: Assigned by agencies like CRISIL or ICRA, indicating the issuer’s creditworthiness. Ratings range from AAA (highest quality) to D (default).

Trading and Pricing

Corporate bonds can be traded in the secondary market through exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). Bond prices fluctuate based on:

• Interest Rates: Bond prices and interest rates are inversely related. When rates rise, prices fall, and vice versa.
• Credit Quality: Upgrades in credit ratings increase bond prices, while downgrades decrease them.
• Market Demand: High demand can drive prices above face value, while low demand can lead to discounts.

For example, if interest rates drop from 6% to 5%, a bond with a 6% coupon becomes more valuable, potentially trading at a premium.

Coupon Payments and Maturity

Investors receive coupon payments, typically semi-annually or annually, providing a steady income stream. At maturity, the issuer repays the face value, assuming no default. For instance, a 1,000 bond with a 5-year maturity and 7% coupon paid half-yearly pays 35 semi-annually and returns 1,000 at maturity.

Benefits of Investing in Corporate Bonds

Corporate bonds offer several advantages, making them a compelling choice for beginners.

• Regular Income: Fixed coupon payments provide predictable cash flows, ideal for retirees or income-focused investors.
• Diversification: Corporate bonds have a low correlation with equities, reducing portfolio volatility.
• Capital Appreciation: Declining interest rates or improved issuer creditworthiness can increase bond prices, offering capital gains if sold before maturity.
• Seniority in Capital Structure: Bondholders have priority over shareholders in bankruptcy, increasing the likelihood of recovering investments.
• Variety: Investors can choose from investment-grade (AAA to BBB) or high-yield bonds, tailoring risk and return to their preferences.

Risks Associated with Corporate Bonds

While corporate bonds offer attractive returns, they come with risks that investors must understand.

• Credit Risk: The risk of issuer default. Historical data shows default rates for investment-grade bonds at 0.1–0.5% annually, but high-yield bonds can reach 3– 4%.
• Interest Rate Risk: Rising rates reduce bond prices. For example, a 1% rate increase can decrease a 10-year bond’s price by approximately 7–8%.
• Liquidity Risk: Some bonds have low trading volumes, leading to wider bid-ask spreads. In India, secondary market trading averages 5,722 crore daily, unchanged since 2018.
• Inflation Risk: Fixed payments lose purchasing power if inflation rises. With India’s CPI inflation projected at 4% for 2025–26, this risk is notable.
• Call Risk: Callable bonds may be redeemed early if rates fall, forcing investors to reinvest at lower yields.

How to Invest in Corporate Bonds

Investing in corporate bonds is accessible to retail investors through various channels, particularly in India’s growing bond market.

Investment Channels

• Primary Market: Investors can buy bonds during initial offerings, often through banks or brokers. Minimum investments may be higher, sometimes 10,000 or more.
• Secondary Market: Bonds are traded on exchanges like NSE, BSE, or online bond investment platforms such as AltiFi. These platforms allow smaller investments and greater flexibility.

Selection Criteria

When choosing bonds, consider:

• Yield to Maturity (YTM): The total return if held to maturity, factoring in coupon payments and price changes. For example, a bond purchased at a discount may have a higher YTM than its coupon rate.
• Duration: Measures sensitivity to interest rate changes. Shorter-duration bonds are less volatile.
• Credit Rating: Opt for AAA or AA-rated bonds for safety, or BBB-rated bonds for higher yields with increased risk.
• Sector Diversification: Spread investments across industries like technology, health- care, and energy to mitigate sector-specific risks.

Practical Steps

• Open a demat account with a platform like AltiFi.
• Research bonds using credit ratings and market data.
• Assess risk tolerance and investment horizon.
• Monitor market conditions, such as interest rate trends and issuer financials.

Latest Developments in the Fixed Income Market

The Indian corporate bond market is undergoing significant transformation in 2025, driven by monetary policy and structural changes.

Repo Rate Cuts

The RBI has implemented three consecutive repo rate cuts in 2025, reducing the rate from 6.5% to 5.50% by June. These cuts have:

• Lowered Borrowing Costs: Companies can issue bonds at lower yields, reducing debt servicing costs.
• Increased Bond Prices: Existing bonds with higher coupons have risen in value, offering capital gains.
• Tightened Credit Spreads: The yield differential between corporate and government bonds has narrowed, reflecting increased investor confidence.

Market Growth

The corporate bond market is projected to double to 65–70 lakh crore by March 2025, driven by increased issuances and foreign investment. Foreign portfolio investors (FPIs) invested 121,059 crore in FY24, the highest since 2014–15. Regulatory reforms by the Securities and Exchange Board of India (SEBI), such as simplified public issuance processes, are enhancing market accessibility.

Global Recognition

The inclusion of Indian government bonds in JPMorgan’s GBI-EM index is expected to attract $25–30 billion in inflows by April 2025, indirectly boosting corporate bond liquidity. This global recognition underscores India’s growing role in the fixed-income market.

Indian Corporate Bond Market Trends (2024–2025)

AltiFi: Democratizing Bond Investing

AltiFi, launched by Northern Arc Capital, is a digital platform that makes fixed-income investments, including corporate bonds, accessible to retail investors. With a minimum investment of 10,000, AltiFi offers a curated selection of bonds, debt securities, and securitized instruments. The platform’s user-friendly interface simplify the investment process for beginners, while its focus on transparency and risk management ensures informed decision-making. As of 2025, AltiFi has facilitated over 4,163.29 million in investments, serving a community of 30,518 registered investors.

Conclusion

Corporate bonds offer a compelling opportunity for beginners to achieve steady income and diversification in their portfolios. While they carry risks such as credit and interest rate volatility, careful selection and market awareness can mitigate these challenges. The RBI’s repo rate cuts in 2025, combined with the projected growth of the corporate bond market, create a favorable environment for investors. Platforms like AltiFi further enhance accessibility, enabling retail investors to participate in this dynamic market. By understanding the fundamentals and staying informed about economic trends, beginners can confidently incorporate corporate bonds into their investment strategies.