A bond is a security that pays a specific amount of interest for a given period of time and repays the face value of the security on the maturity date.
Bonds improve portfolio diversification and help reduce portfolio risk while providing stable income.
Government and companies issue bonds. Here’s what you need to know about corporate bonds.
A corporate bond is one way for a company to raise money from investors to finance its business activities. In return for your money, the company issuing the bonds promises to pay you regular interest payments, and at a specified maturity date, pay back the money you originally invested.
Corporate bonds typically carry higher risk than Government bonds and therefore a higher yield. Generally, the higher the credit quality of the issuer, the lower the risk associated with the security and the lower the yield expected by investors. Conversely, the higher the credit risk of the issuer (i.e. the ability of the company to meet coupon and capital repayments), the higher the interest rate that investors will expect in order to risk lending funds to the issuer.
The issuing company can pay interest at a fixed rate for the life of each bond, or at a floating rate where the rate floats in line with movements in a benchmark interest rate, usually the variable interest rate for a bank bill for a three or six month term. A fixed margin is generally added to the benchmark interest rate to get the floating rate.
So, your coupon interest payments could vary: you could get higher returns if the benchmark interest rate goes up or lower returns if the benchmark interest goes down.
You can buy corporate bonds through a public offer. The company makes a public offer and issues a prospectus and investors apply directly to buy bonds, at the face value of the bond which is usually $100 each. You can also buy some corporate bonds on the ASX after they have already been issued in the primary market. If you do buy them on the ASX, you will pay the market price that may be higher or lower than the face value of the bond.
There are a number of corporate bonds available in the unlisted bond market, issued by companies operating across a diverse range of industries like retail, energy and resources, property and infrastructure. As an example, corporate bond issuers include National Australia Bank, Westpac, Telstra, Suncorp and GE Capital.
Retail bonds are a special class of corporate bond with an initial minimum trading parcel as low as $5,000 making investment accessible to retail investors. Larger investors can also access the wholesale corporate bond market. Minimum parcels are typically $500,000, although smaller parcels can be available.