Corporate Bonds Interest Rates: How They Affect Your Investments

When we hear the word "interest rate" it can sound a bit technical. But if you're someone looking at fixed income options like Indian corporate bonds it's important to understand how these rates work. Don't worry it's actually quite simple once you break it down.

First things first -what are corporate bonds?

Let's quickly go over the corporate bonds definition. Imagine a company needs money to grow or manage its day to day work. Instead of taking a loan from a bank they ask regular people like you and me to lend them money. In return the company promises to pay interest regularly and give the money back after a certain time. That's what a corporate bond is.

You're not buying shares or becoming an owner. You're just lending money and earning interest in return.

 

So what is the interest rate?

When a company gives you a bond they also promise to pay you a fixed amount regularly. This is called the interest rate or coupon rate.

Let's say you invest ₹1 lakh in a bond that offers 9 percent interest. You'll get ₹9,000 every year either once a year or in two parts depending on the bond. This keeps happening until the bond matures. At the end you get your ₹1 lakh back too.

Simple right?

How is this interest rate decided?

Now you might wonder why does one bond offer 8 percent and another one 10 percent? It depends on a few things:

How strong the company is: If the company is very safe and has a good credit score it does not need to offer high interest. But if it is a smaller or riskier company it will offer more interest to attract people

 

What's happening in the economy: If overall interest rates in the country go up new bonds will offer more. If rates go down new bonds will offer less

How long the bond lasts: Bonds that lock your money for a longer time usually give a higher interest rate

How does this affect you?

If you hold the bond till maturity nothing really changes. You keep getting the promised interest and your money comes back at the end.

But if you want to sell the bond before maturity interest rates in the market matter a lot.

If rates go up your old bond gives lower returns compared to new ones. So it may not sell for a great price

If rates go down your bond becomes more valuable because it gives better returns than what is available now

So even if the interest is fixed the value of your bond can change depending on the market

What should you do as an investor?

If you just want regular income and plan to hold the bond till the end choose good quality bonds with a decent interest rate

If you want to buy and sell bonds in between keep an eye on market trends and RBI decisions

Always check the company’s credit rating the interest rate and how long the bond lasts before investing

Final thoughts

Interest rates are a big part of Indian corporate bonds. They decide how much you earn and how valuable your bond could be in the future.

Now that you understand the corporate bonds definition and how interest rates work you are better prepared to make smarter investment choices.

 

Just remember you are not gambling here. You are lending your money to a company and getting paid for it. And when done right it can be a steady and reliable way to grow your money.