Is now the right time to invest in corporate bonds?

In the midst of unprecedented turmoil in the financial markets, there are some fantastic opportunities for investors. Of particular interest are corporate bonds, as they offer similar or better returns than shares in the current climate, and represent less of a risk for investors.

Corporate bonds are essentially IOU notes written by listed companies who need to raise funds. Bonds usually have a nominal value of 100GBP, although their actual market price can vary depending on the performance of the company concerned.

The coupon rate attached to the bond is the amount of interest that will be paid to the holder of the bond on an annual basis. The rate is fixed upon the nominal value, rather than the market value of the bond, and is given a value in pounds rather than a percentage. A typical bond with a nominal hundred pound value might have a coupon rate of between five and ten pounds.

At the moment, there are a lot of companies looking to raise funds to lessen the effects of the recession, which means increased competition for investment. This means that many firms are offering higher than average coupon rates in an attempt to attract investors.

Corporate bonds are safer than shares in a number of ways. One reason for this is that interest payments have to be paid to creditors before dividends are paid to investor, so you will receive an income even if the firm does not turn a profit that year.

The main risk involved with corporate bonds is that of the company who issued the bonds going bust. While bondholders could expect to be the first people to be paid in the event of the liquidation of a firm, there is no guarantee that there will be enough money to go round.

With company liquidations at their highest level for eighteen years, the risk of bankruptcy is not insignificant. However, if you invest in several different bonds via one or more corporate bond funds, you can dilute this risk.

Corporate bond funds are communal investments that spread the risk of company liquidations across many different bonds. So if one of the companies that the bond fund invested in collapsed, the effects on the overall value of the bond portfolio would be diluted. Lecia Selbo opened his own corporate bonds with Legal