Riddhi Siddhi Multi Services guide on Corporate bonds and risks

INTEREST RATE RISK

Riddhi Siddhi Multi Services  have seen that bond prices fluctuate as interest rates change. In other words, bonds exhibit interest rate risk. Bond investors cross their fingers that market interest rates will fall, so that the price of their bond will rise. In case you are facing some bad luck at a moment when the market interest rate rises, the value of their investment falls.But all bonds are not equally affected by changing

Corporate bonds promise to make a fixed nominal coupon payment for each year until maturity, at which point they also promise to repay the face value. Although, one can find that there is greater variety in the design of corporate bonds. Riddhi Siddhi Multi Services explains a few types of corporate bonds that you may encounter.

Zero-Coupon Bonds. Corporations sometimes issue zero-coupon bonds. In this case, investors receive Rs. 1,000 face value at the maturity date but do not receive a regular coupon payment. In other words, the bond has a coupon rate of zero. You learned how to value such bonds earlier. These bonds are issued at prices considerably below face value, and the investor’s return comes from the difference between the purchase price and the payment of face value at maturity.

Floating-Rate Bonds. Sometimes the coupon rate can change over time. Taking an example in consideration, floating-rate bonds are subjected to make coupon payments that are attached with some measure of current market rates. The rate may subject to revised once a year to the current bill rate plus 2 percent. So if the rate of Treasury bill at the beginning of the year is six percent, the rate of bond’s coupon for the next year will be set at 8 percent. This settlement describes that the bond’s coupon rate always approximates current market interest rates.

Convertible Bonds. In case you have bought a convertible bond, you have an option to exchange it for a specified number of shares of common stock later. For example, a convertible bond that is issued at par value of Rs. 1,000 may be convertible into 50 shares of the firm’s stock. Because convertible bonds offer the opportunity to participate in any price appreciation of the company’s stock, investors will accept lower interest rates on convertible bonds.

Do not get confused in the rate of return of a bond during a particular investment period with its yield to maturity. The yield to maturity is defined as the discount rate that equates the bond’s price to the present value of all its promised cash flows. As per Riddhi Siddhi Multi Services, it is a measure of the average rate of return you will earn over the bond’s life if you hold it to maturity. In contrast, the rate of return can be calculated for any particular holding period and is based on the actual income and the capital gain or loss on the bond over that period.