Corporate Bonds

By Author: Lecia Selbo
Total Articles: 49
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In the space of just a few weeks corporate bonds have suddenly become a very mainstream topic of conversation. Before the start of the year few outside of the financial world would have known what a corporate bond is, but with the issuance of over ?500m worth of bonds by Manchester United in January, they suddenly have become much more well-known.

As well as being a method for companies to raise money, corporate bonds are also an investment and that is why they are often connected with ISAs. Through an ISA they count as a ''stocks and shares ISA'' and therefore, if you choose to invest, won''t have an impact on the amount you can save in cash.

So what is a corporate bond? A corporate bond is, in simplest terms, a bond issued by a corporation. The term bond comes from when people in stock markets used to say ''my word is my bond'' and in this case it is an agreement to pay the owner of the bond money.

Therefore, companies use corporate bonds to raise a lot of capital quickly when they want to expand or invest, or in the case of Manchester United, service already existing debt. As a debt product they can be ...
... a little risky because there is always the chance that the company will default on its interest payments and the bond holder could be left with nothing.

After their original issuance the price of the bond can change. The cost is calculated by the risk of default balanced against the original price and the interest rate. They, therefore, are an investment, the value of which can go up, or down, depending on the market and the condition of the issuing company.

Accordingly, they can find themselves as part, or even a whole, of an ISA. If the company doesn''t default, they guarantee a relatively high rate of return in comparison to most other forms of savings.

As for the second question, do they represent a good deal? In general, yes, in particular if you stick with one of the more well-known providers such as Legal and General. Buying them directly can be risky, and if you''re going to do that it''s important you really know what you''re doing before you buy. Through an ISA is safer and offers a high rate of return, though the investment may face a management cost which could reduce your returns.

Finally, remember that corporate bonds are an investment in debt. That means that they can be very lucrative and offer a high rate of return, or, as the credit crunch proved they can go quite badly wrong. As a component of a stocks and shares ISA they can offer excellent return rates, but do bear in mind that it''s not a guaranteed high return and they can default. Lecia Selbo opened his own corporate bonds with Legal