Corporate Bonds Explained

By Author: Lecia Selbo
Total Articles: 49
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When it comes to investing your hard earned money, one of the safest and most profitable ways to do it is to invest in corporate bonds. These are effectively loans to private firms with a fixed term and rate of interest.

Corporate bonds are traded on the stock market in much the same way as shares and stocks are. The coupon rate, which is the fixed rate of interest attached to a bond, is always expressed in monetary rather than percentage terms, for example eight pounds rather than eight percent.

Bonds are usually initially sold at a value of 100GBP each, but its nominal value can fluctuate over the period of the loan. They can be bought or sold at any point during the period of the loan at their current stock market price.

The initial price of a bond is what will be repaid to the investor when it matures, regardless of changes to its market value. Whether you make a profit or a loss on the bond is largely dependent on how long you have held the bond and the price that you paid for it.

If you were to buy a bond with a coupon rate of ten percent for 140 pounds, and you held it for four years before ...
... it matured, you would only break even on your investment. This is because you would receive a hundred pounds in repayment for the bond itself, plus forty pounds in interest over four years.

It is relatively rare for a bond not to make a profit of some sort, however, as the market price is dictated to an extent by its value to the investor. If you bought a bond with a coupon rate of eight percent for 80 pounds, and you kept it for three years before it matured, you would turn a healthy profit of 48 pounds on your investment.

On the whole, corporate bonds are a far less risky investment than stocks and shares, as they provide a guaranteed return as long as the company stays in business. However, the returns from stocks and shares can be significantly higher, depending on market conditions.

As a rule, most investors in corporate bonds put their money into corporate bond funds rather than buying them individually, as this is a lot easier to do, and spreads the risk across many firms for higher and more reliable returns. Lecia Selbo opened his own corporate bonds with Legal