Different Types of Corporate Bonds

Picture this: you’re at a busy marketplace. But instead of food or clothes, you see companies offering a way for you to help them grow, simply by lending them your money. In return, they promise to pay you back—plus a little extra for your trouble. That’s the simple idea behind corporate bonds.

Corporate bonds are an easy way for companies to raise money and for people like you and me to earn fixed & regular returns. It’s not as risky as equity, certainly not as volatile, but it usually pays more than keeping money in your savings account or putting it in other traditional savings instruments. Once you understand how they work, you’ll see why they form an important pillar of your investment portfolio.

Let’s start with a quick look at the big picture. As of March 2025, the total bond market in India was worth an incredible ₹2,38,22,749 crore (that’s US$2.78 trillion!). Out of this, corporate bonds make up ₹53,63,554 crore ($626.72 Billion)—or about 23% of the market. Government bonds take up the biggest share, but corporate bonds are an important slice, getting more popular with each passing year.

What are Corporate Bonds?

So, what is a corporate bond? It’s basically a loan that you, as an investor, give to a company. The company agrees to pay you interest (often called a coupon), either regularly or at the end, and then pay your money back after a set time, known as the maturity date.

Think of it as a simple IOU from the company to you. Companies use the money for all sorts of things—maybe building new factories, buying equipment, or just everyday expenses. For you, it means getting regular interest and your money back at maturity. Corporate bonds have become really important in India. As companies need more funds and the economy continues to grow, more corporate bonds keep coming to the market. And here’s the best part: the minimum ticket size to invest in most bonds is now just ₹10,000. That makes it much easier for ordinary investors to get started.

Types of Corporate Bonds by Security and Seniority

Corporate bonds can also be categorized based on their security and repayment priority. This hierarchy determines the order in which bondholders are repaid in case the issuing company faces financial difficulties. Below is a breakdown of the seniority levels:

Senior Bonds

These bonds have the highest priority in repayment. In the event of a default, senior bondholders are paid first, making these bonds relatively safer compared to others. They are often backed by the company’s assets, providing additional security.

Subordinate Tier 1 Bonds

These bonds rank below senior bonds in the repayment hierarchy. While they carry slightly higher risk, they also offer better returns to compensate for the lower priority.

Subordinate Tier 2-Upper Bonds

These bonds come after Tier 1 bonds in the repayment order. They are considered moderately risky and are often issued by companies with strong credit ratings.

Subordinate Tier 2-Lower Bonds

Highlighted in the attached image, these bonds are a step below Tier 2-Upper bonds. They carry higher risk but also offer attractive interest rates for investors willing to take on additional uncertainty.

Subordinate Tier 3 Bonds

These bonds are lower in the repayment hierarchy and are considered high-risk investments. They are suitable for investors seeking higher returns and who have a higher risk tolerance.

Perpetual Bonds

These bonds do not have a maturity date and are often used by companies to raise long-term capital. They are repaid only after all other bondholders, making them one of the riskiest options. Many perpetual bonds are often callable, meaning the issuer may ask for bond’s redemption after a stipulated time period has passed.

Additional Tier 1 Bonds (AT1 Bonds)

These are hybrid instruments that combine features of both debt and equity. They are often issued by financial institutions and carry significant risk, as they are repaid only after other senior and subordinate bonds.

Subordinate Tier 2 Bonds

These bonds are a general category within the subordinate tier and are repaid after senior bonds but before Tier 3 bonds. They offer a balance between risk and return.

People who want safety often pick secured bonds. If you’re comfortable taking a bit more risk for a higher return, unsecured bonds can be a good option. Just make sure you know what you’re getting into.

Types of Corporate Bonds Based on Equity Features

Some bonds can act like a ticket to become part-owner in the company. These come in two main types:

Convertible Bonds

Convertible bonds start off just like any other bond. But you get the option (sometimes at a fixed date or price) to convert the bond into shares of the company. If the company does well, you could make extra profits from rising share prices—plus you get the steady bond payments while you wait.

Non-convertible Bonds

Non-convertible Bonds are plain and simple. They act just like loans, pay you interest, and when it’s over you get your money back. They don’t turn into shares and generally pay a higher coupon than convertible ones because there’s no chance of extra equity profit.

Both are common in India, and the choice depends on what you want—do you like the idea of getting shares if things go well, or do you prefer sticking to a fixed payment plan?

Types of Corporate Bonds by Structure

Fixed Coupon Rate Bonds (Plain Vanilla):

These pay a fixed rate of interest at regular intervals, making them easy to understand and ideal for stable returns.

Floating Coupon Rate Bonds:

The interest rate changes based on benchmarks (like RBI rates), so your returns can move up or down.

Zero-Coupon Bonds:

These don’t pay periodic interest. Instead, you buy them at a big discount to their face value and get the full amount at maturity.

Callable and Puttable Bonds:

With a callable bond, the issuer can redeem the bond before maturity. With a puttable bond, you (the investor) can choose to sell it back early at preset terms.

Subordinated Bonds:

These are paid after senior bonds in case a company defaults, so they carry more risk—but can offer higher returns.

Perpetual Bonds:

These bonds don’t have a set maturity date and pay interest indefinitely, unless the issuer decides to repay.

Tax-Free Bonds:

Mostly issued by government-backed entities, these provide interest that is fully tax-free.

Covered Bonds:

Secured by a separate pool of assets, adding an extra layer of safety for investors.

Types of Corporate Bonds by Maturity (Term)

Short-Term Bonds:

Mature in 1 to 3 years. They usually carry less risk and offer easier access to your money.

Medium-Term Bonds:

Mature in 4 to 10 years and offer a balance between risk, return, and liquidity.

Long-Term Bonds:

Mature after 10 years or more, offering higher returns but can be more affected by interest rate changes.

This range of bond types lets you pick and mix according to your safety preference, need for returns, and how long you want your money to work for you.

Don’t forget taxes—they matter! In India, the interest you earn from corporate bonds is added to your income and taxed as per your slab. This is true no matter how much you earn from them.

If you sell your bonds before three years, any profit is taxed just like regular income.

Some special bonds come with tax benefits—like those from infrastructure projects. If you’re not sure, talking to a tax expert can really help you get the most out of your investments.

How To Choose the Right Type of Corporate Bond

Here’s where it all comes together:

Risk appetite:

Like playing it safe? Stick to secured, short-term, or bonds from big companies. Want more reward? Look at unsecured or longer-term bonds.

Income needs:

Need regular cash? Go for fixed-rate bonds. Planning for something big in a few years? Check out zero-coupon bonds.

Check the company

Always look at the company’s credit rating and track record. Higher ratings mean lower risk but also lower returns.

Market trends:

If experts think interest rates will rise, floating-rate or short-term bonds could be better. If rates are falling, fixed long-term bonds can lock in higher returns.

Tax effects:

Match the bond type and your holding period to what works best for your tax situation.

Remember, you can start investing with as little as ₹10,000.

Conclusion

Corporate bonds open up a world of opportunity for anyone wanting to grow their money with steady returns. They sit perfectly between the safety of government bonds and the excitement (and risk) of equity. From super-safe secured bonds to those that can become shares, and from short to long-term options, there’s something for every type of investor.

With India’s $2.78 Trillion bond market growing fast every year, it’s easier than ever for both new and experienced investors to take part. Explore your options, pick what suits you best, and watch your savings grow steadily.

FAQs

Are corporate bonds safe?

The safety depends on the company issuing the bond. Secured bonds are safer because real assets back your money. But all corporate bonds have more risk than government bonds.

How much interest do corporate bonds pay?

It varies! Usually anywhere from 8% to 12% a year, depending on who’s issuing the bond and how long it lasts.

What happens when the bond matures? 

You get your original investment (the face value) back, plus your final interest payment.

Should I buy corporate bonds or government bonds?

Government bonds are safer but pay less. Corporate bonds pay more but carry more risk. Many people invest in both and diversify their portfolios.

How big is the corporate bond market in India?

As of March 2025, the total outstanding bond market size in India was ₹2,38,22,749 crore or US$2.78 trillion. Corporate bonds make up ₹53,63,554 crore ($626.72 Billion), or about 23% of the whole market.

What is the minimum amount to invest in a corporate bond?

You can start with as little as ₹10,000 in most corporate bonds.

Are corporate bonds a good investment in India?

Yes, especially if you want regular returns and are comfortable with moderate risk. Just make sure you check the company’s rating.

Do corporate bond funds have risk?

Yes, all investments have risk. Bond funds can lose value if interest rates rise or if companies in the fund have trouble paying back.

What is the 10-year corporate bond rate in India?

Rates change, but it’s generally between 8% and 12%, depending on the company and market trends.

What’s the longest I can invest in a corporate bond?

Some bonds last 30 years or even more, but most are in the 5- to 15-year range.

Disclaimer : Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully.