LOOKING FOR FIXED INCOME INVESTMENTS? LOOK BEYOND BANK FDS
You should look at investing in fixed income instruments apart from Bank FDs.
Corporate bonds are fixed income instruments that give a higher rate of return
and though they have more risk than FDs, you can consider bonds of reputed
companies.
Fixed Income investments have long been associated with Fixed Deposits in banks.
However, you can look at corporate bonds to get a higher interest rate. Corporate
bonds are considered to carry a higher risk compared to government bonds, as a
result of which you get higher interest rate. However, the interest on corporate
bonds is subject to central, state, and local taxes.
Decision for investing in corporate bonds depends on risk taking ability of an
investor. Some investors believe that corporate bonds have little or no risk. They
range from investment grade to junk grade depending on the issuing companies.
The main risk is that the company issuing the bonds might become insolvent. This
means you could lose some or all of your money because the company is not able
to pay its creditors due to lack of funds and or if it goes into liquidation. Corporate
bonds are also subject to other investment risks like interest rate risk, liquidity risk
and prepayment risk. It is always advisable to go through the prospectus of the
bond issue to understand the issuer and all other factors associated with the bond
issue.
For example, bonds issued by companies like Infosys, Wipro and L&T are
considered very safe considering their goodwill and sustainability in the market.
Corporate bonds come under the ‘Debt’ category and it is the company’s
borrowings. Therefore, it is generally less risky than investing in shares of the
company. Bonds have different features or characteristics depending on the
specific issuing organizations or institutions. The two major types of Corporate
Bonds are as follows:
Secured Bonds: These are also known as asset covered bonds. Bonds are backed
by any collateral security or mortgaging any asset of the company. So, there is a
safety that in case company becomes insolvent, assets can be sold and the
principal amount will be repaid.
Unsecured Bonds: Also known as debenture bonds, they are backed solely by the
general credit-worthiness of the issuer. Regular corporate bonds are an example of
unsecured bonds. They are not so safe mode of investment.
Here is a brief look at what to consider when evaluating corporate bonds:
Coupon: Coupon rate on bond may be fixed or fluctuating. A fixed rate bond is a
type bond with a fixed Coupon (interest) rate, as opposed to floating bonds. A
fixed rate bond is a long term debt paper that carries a predetermined interest
rate which is payable at specified dates before bond maturity. Remember that
corporate bonds are not generally designed to maximize your wealth (that is, the
bonds you buy are unlikely to increase in value during the time you have the
investment).
Duration: If you are not a long term investor than you cannot block your money on
bonds with higher duration of time say 10-15 years. Invest in corporate bonds after
considering your financial goals and your investment time horizon.
Convertibility: These bonds can be exchanged for some specified amount of
common or preferred stock in the issuing company. At the time of issue, the terms
of conversion will be outlined, including the times, prices, and conditions under
which it can occur.
If you are willing and able to make a riskier deal invest in Corporate Bonds as they
have higher returns than fixed deposits.
In a nutshell, here are the features of Corporate Bonds:
Risk category
Higher than Government bonds, but safer than equity
Returns
Higher returns compared to Government bonds and
fixed deposits; but lower than equity. Returns depend on
the coupon rate of the bond
Duration
Generally long term in nature of 10-15 years
Convertibility
These bonds can be converted to common stock of the
company, depending on the terms of the issue.
Types of bonds
Secured: Backed by company assets, which acts as the
collateral security for the issue.
Unsecured: Backed solely
by the credit-worthiness of the company.
You should look at investing in fixed income instruments apart from Bank FDs.
Corporate bonds are fixed income instruments that give a higher rate of return
and though they have more risk than FDs, you can consider bonds of reputed
companies.
Fixed Income investments have long been associated with Fixed Deposits in banks.
However, you can look at corporate bonds to get a higher interest rate. Corporate
bonds are considered to carry a higher risk compared to government bonds, as a
result of which you get higher interest rate. However, the interest on corporate
bonds is subject to central, state, and local taxes.
Decision for investing in corporate bonds depends on risk taking ability of an
investor. Some investors believe that corporate bonds have little or no risk. They
range from investment grade to junk grade depending on the issuing companies.
The main risk is that the company issuing the bonds might become insolvent. This
means you could lose some or all of your money because the company is not able
to pay its creditors due to lack of funds and or if it goes into liquidation. Corporate
bonds are also subject to other investment risks like interest rate risk, liquidity risk
and prepayment risk. It is always advisable to go through the prospectus of the
bond issue to understand the issuer and all other factors associated with the bond
issue.
For example, bonds issued by companies like Infosys, Wipro and L&T are
considered very safe considering their goodwill and sustainability in the market.
Corporate bonds come under the ‘Debt’ category and it is the company’s
borrowings. Therefore, it is generally less risky than investing in shares of the
company. Bonds have different features or characteristics depending on the
specific issuing organizations or institutions. The two major types of Corporate
Bonds are as follows:
Secured Bonds: These are also known as asset covered bonds. Bonds are backed
by any collateral security or mortgaging any asset of the company. So, there is a
safety that in case company becomes insolvent, assets can be sold and the
principal amount will be repaid.
Unsecured Bonds: Also known as debenture bonds, they are backed solely by the
general credit-worthiness of the issuer. Regular corporate bonds are an example of
unsecured bonds. They are not so safe mode of investment.
Here is a brief look at what to consider when evaluating corporate bonds:
Coupon: Coupon rate on bond may be fixed or fluctuating. A fixed rate bond is a
type bond with a fixed Coupon (interest) rate, as opposed to floating bonds. A
fixed rate bond is a long term debt paper that carries a predetermined interest
rate which is payable at specified dates before bond maturity. Remember that
corporate bonds are not generally designed to maximize your wealth (that is, the
bonds you buy are unlikely to increase in value during the time you have the
investment).
Duration: If you are not a long term investor than you cannot block your money on
bonds with higher duration of time say 10-15 years. Invest in corporate bonds after
considering your financial goals and your investment time horizon.
Convertibility: These bonds can be exchanged for some specified amount of
common or preferred stock in the issuing company. At the time of issue, the terms
of conversion will be outlined, including the times, prices, and conditions under
which it can occur.
If you are willing and able to make a riskier deal invest in Corporate Bonds as they
have higher returns than fixed deposits.
In a nutshell, here are the features of Corporate Bonds:
Risk category
Higher than Government bonds, but safer than equity
Returns
Higher returns compared to Government bonds and
fixed deposits; but lower than equity. Returns depend on
the coupon rate of the bond
Duration
Generally long term in nature of 10-15 years
Convertibility
These bonds can be converted to common stock of the
company, depending on the terms of the issue.
Types of bonds
Secured: Backed by company assets, which acts as the
collateral security for the issue.
Unsecured: Backed solely
by the credit-worthiness of the company.
Happy Investing
Source:Gettingyourich.com
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