Corporate Bonds Demystified

By Author: Lecia Selbo
Total Articles: 49
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Corporate bonds are essentially IOU notes issued by a corporation in order to raise money to expand their business. The term usually refers to bonds that mature after a year or more. Bonds with a shorter maturity are usually called commercial papers.

The term "corporate bonds" is often used to describe any type of bond apart from those issued by national and state governments in their own currency. These bonds are usually referred to as being government bonds.

A large proportion of corporate bonds are bought and sold by dealers in small scale markets. However, you may come across some bonds as being referred to as listed bonds. This refers to corporate bonds that are listed on major exchanges, rather than smaller markets.

The interest on bonds is always expressed in currency, rather than percentage, terms as the rate is always fixed. This interest rate is known as the coupon rate. For example, a 100GBP bond might have a coupon rate of seven pounds, which is the equivalent of a fixed seven percent interest rate.

The coupon is almost always taxable, although you can claim this tax back if the investment ...
... is part of a stocks and shares ISA. In some instances, the coupon rate might be zero if the bond has a high redemption value and a very low investor risk.

There is an option with some bonds to redeem them before they mature. Bonds with this option are usually referred to as having an embedded call option. You can also get convertible bonds that give the investor the option of converting the bond into equity.

In terms of risk, bonds represent a safer investment than shares do. Although the risk is small, all corporate bonds do have risk factor as the issuing company could always potentially default on the loan. If you are looking for the lowest risk of bond investment, then your best bet is to opt for government bonds.

The risk factor attached to a corporate bond depends very much on the financial state of the corporation that issued it and current market conditions. The riskier a bond is, the higher the coupon rate will tend to be.

Lecia Selbo opened his own corporate bonds with Legal