Individual Corporate Bonds

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.

Flexibility…

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.

The appeal:

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.

To book a free consultation contact us today

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