Investor Corner/The asset classes/Debt Concepts
2.2.11 Corporate Bonds
Corporate bonds are debt issued by companies rather than governments. They generally offer a higher yield than government bonds, compensating investors for the additional credit risk a private borrower carries.
Why the extra yield exists
A company issuing a bond is asking investors to lend it money on the strength of its own business, not a sovereign guarantee. Because a business can genuinely fail in a way that a government generally cannot, the market demands extra compensation, the credit spread discussed earlier, to accept that additional risk.
A wide and varied category
Corporate bonds range from those issued by large, extremely stable companies with strong credit ratings, offering only a modest premium over government securities, to those issued by smaller or more leveraged companies, offering considerably higher yields to compensate for correspondingly higher default risk. Treating all corporate bonds as one uniform category misses most of the actual decision involved.
How they typically fit a portfolio
High-quality corporate bonds are commonly used to add a modest amount of extra yield over government securities without taking on excessive risk, often through corporate bond funds or banking and PSU funds that concentrate on well-rated issuers. Lower-rated corporate bonds, offering higher yields, are generally sized as a smaller, more deliberate allocation given the meaningfully higher risk involved.
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