Question

What is a CORPORATE BOND, note corporate not governmental, don't go all governmental on me, stick with the corporate world...

2.) How do these bonds work?

3.) What then is the risk(s) you carry with a bond hence what offsets this risk...

Answer 1

Corporate bonds are all such bonds which are issued by the business houses which are individual businesses houses and these corporate bonds will be issued by business houses in the form of debt instruments in order to raise the money as debt capital from the market.

2.corporate bonds will be working to raise the capital from the market for a Corporation and it will help them raising high amount of money from the market as they are having fixed payment in the form of interest and those bond holders will be receiving interest payments and they will be as principal payment at the end of the maturity and the businesses will also be getting higher amount of money as debt capital by corporate bonds.

3. Risk related to to corporate bonds will be-

A. Default risk which will be related to default upon payment of the interest by the company because the company will be having lower liquidity and they do not have enough cash in their hands

B. Credit risk is associated with repayment of the principal amount to the bondholders and if the business does not have enough assets in order to repay the principal amount, it is related to the credit risk.

Investor can offset these risks by only subscribing to those bonds which are higher investment grade corporate bonds and they will be trying to enter into hedging other asset diversification techniques and they can also try to reshuffle their Bond portfolio according to the interest rate changes in the economy