How to Evaluate a Corporate Bond: The 10-Point Checklist Before You Click Buy
Corporate bonds sit in the dangerous middle of investing. They look like FDs, with fixed dates and fixed coupons, while carrying real credit risk, and the extra 2–4% of yield is the market’s payment for taking it. This checklist is about confirming you’re paid enough, and that you’d survive being wrong. It teaches evaluation rather than selection: we don’t recommend securities, and anyone who does should be SEBI-registered.
The checklist
1. Rating: a floor, not a verdict
AA+ and above from CRISIL, ICRA, CARE or India Ratings is the conservative retail zone. Treat it as a filter rather than a conclusion, because IL&FS and DHFL both carried investment-grade ratings uncomfortably close to their collapses. Check the rating history on the agency’s site, including upgrades, downgrades and outlook. A stable AA beats a freshly downgraded AA+.
2. Who owes you the money
Read the issuer name character by character. Groups issue from several entities, the operating company, a holdco, an NBFC arm, and their balance sheets can differ enormously. The ISIN on your contract note is the truth. Marketing names are not.
3. Secured or unsecured, senior or subordinated
“Secured” means specific assets back the bond, enforced by the debenture trustee if things go wrong. Subordinated and Tier-2 paper queues behind everyone else in a default, and AT1 or perpetual bonds can be written off completely. The word “subordinated” in an information memorandum costs you real recovery percentage, so check that the yield pays for it.
4. Listed or unlisted
This one isn’t negotiable. Listed bonds get exchange exit routes and 12.5% LTCG treatment beyond 12 months. Unlisted bonds are taxed at slab regardless of holding period and are far harder to sell. The tax guide shows how much that changes net returns.
5. The spread sanity check
Compute the bond’s YTM with the YTM calculator, then subtract the G-sec yield at the same maturity. That spread is your risk payment. Then ask the question that matters: why is this issuer paying this much? A 350 bps spread on an AA name when peers pay 150 isn’t a bargain. It’s the market pricing in something the rating hasn’t caught up with. Below roughly 80–100 bps for mid-grade credit, take the G-sec or SDL instead and sleep better.
6. Leverage and coverage, the five-minute version
From the latest results, look for interest coverage (EBIT ÷ interest cost) above about 2.5× for manufacturers. For NBFCs, which issue most retail NCDs, look instead at capital adequacy, gross NPAs and the borrowing mix. You’re not underwriting to institutional depth here. You’re screening out the obviously stretched.
7. Cashflow structure
Monthly-coupon NCDs yield a little more effectively than the sticker suggests, with 9% monthly working out near 9.38% annually, so check it in the calculator. Cumulative options concentrate all the credit risk at maturity, since everything owed arrives, or doesn’t, on one date. Payout options at least return money to you along the way.
8. Liquidity honesty
Assume you’ll hold to maturity. Exchange volumes in most retail NCDs are thin, and platform buy-backs happen at their bid. If your horizon might shorten, buy shorter maturities rather than hoping for exit liquidity.
9. Price verification
Buying on a platform means running the markup check: the same ISIN across two platforms, plus recent exchange trades. On public issues, compare the coupon against where the issuer’s existing bonds trade. The secondary market is sometimes cheaper than the new issue everyone’s talking about.
10. Position sizing, the rule that saves you
Credit risk is asymmetric. The best case is that you collect your coupons; the worst is a multi-year recovery process that returns pennies. Cap any single issuer at 5% of your fixed-income portfolio, or 10% for the most conservative AAA quasi-PSUs, and cap total sub-AA exposure at an amount you could lose without it changing your life. Ratings diversify poorly in a crisis. The number of issuers you hold is the protection that works.
The 15-minute workflow
- ISIN, then rating and history on the agency site, then listing status.
- Skim the IM: secured? seniority? put or call dates? For callable paper, decide on yield-to-call rather than YTM.
- YTM calculator, spread over the G-sec, and the “why so generous?” question.
- Skim the latest financials for coverage or NPAs.
- Size it, buy it, and diary the coupon dates.
FAQ
Is AAA always safe? Safer, not safe. AAA quasi-government paper (REC, PFC, NABARD and similar) is a different animal from AAA private credit, and the spread usually tells you which one you’re holding.
Are 11–12% NCDs a scam? Usually not. Usually they’re an honest price for real risk. The scam version skips listing, ratings, or both. Either way, size it like the equity-adjacent bet it is.
Should I just buy a corporate bond fund instead? Funds give you diversification and professional monitoring for an expense ratio, which is a sensible default if this checklist feels like work. Direct bonds win on known maturity values and tax efficiency for discount purchases.
Educational content, not investment advice. Tax rules current for FY 2026-27 to the best of our knowledge, but verify with a professional before acting. See the full disclaimer.