When companies wish to raise money, whether it be to expand the business or develop a new product, they can do so by issuing what is known as a ‘corporate bond’. When an investor buys a corporate bond, they are essentially lending money to a company in exchange for an IOU. This IOU will have a term and a maturity date and at this date the full sum originally invested will be returned in full.
Why lend money to companies?
As long as you hold a bond you are paid interest, or what’s more commonly known as a ‘coupon’. This coupon is paid yearly as a return for lending your money to that company, and it is paid as a fixed percentage of the original amount invested.
So, for a £20,000 ten-year bond with a 5% coupon bought at face value (par) an investor would receive £1,000 gross each year in interest and at maturity receive their initial investment of £20,000 back.
Although corporate bonds sound similar to a fixed rate savings account or savings bond there are key differences that need to be considered. A market-traded corporate bond can be bought and sold and its price will change according to the market. So, if you hold a ten-year corporate bond you don’t necessarily have to wait ten years to cash-in the bond. You could sell it at any point and generate a profit or loss depending on whether the price of the bond has risen or fallen at any given moment in time.
With interest rates at historic lows and savings accounts generating little if no return, investing cash into a corporate bond can be seen as a solid investment. The rates available are often much better than most savings accounts and offer a fixed return, with traditionally less volatility than equities.
Corporate bonds are an investment and not a savings product. Your Raymond James Wealth Manager is always to hand to give further advice on investing in corporate bonds as we recommend that you consider these within a balanced and well diversified portfolio.