A corporate bond is a simple investment tool which can provide a secure place for your money, yet still pays interest at rates far in excess of those at a high street bank.
What are Corporate Bonds?
A corporate bond is money lent to a company for a fixed period of time. The company will pay the person who bought the bond an agreed amount of interest, then return the borrowed money in full at the end of the loan period.
As Ryan Lasker, a finance writer and Certified Public Accountant, explains, “[If] a corporation issues five-year bonds today for $100 with an annual 5% fixed interest rate, called the coupon rate. You pay $100 for the issue, and you’ll get paid $5 each year for the next five years. You’ll get your $100 back at the end of the fifth year, when the bond matures, and you earned $25 for letting the corporation hold your $100 for five years.”
Bonds come in many forms, such as state bonds (lending money to a national government) or secured bonds (lent against a specific asset). However, corporate bonds are an investment in a business.
Corporate bonds are a common tool for companies that have plans for expansion or for those that simply wish to raise funds without issuing shares. About 20% of all bonds are corporate bonds.
Corporate Bond Risk
The ultimate risk with a corporate bond is if the company goes bankrupt or does not have enough money to pay the investor back. However, this outcome is very rare, as investment expert Thomas Kenny advises, “Corporate bonds have generally experienced a low incidence of default over time. Since 1981, bonds with the highest credit rating, AAA, have had an average default rate of 0%.”
Corporate Bond Return
In the same way that the risk of a company defaulting on its debt will vary from company to company, so will the interest it offers.
The advantage in buying corporate bonds is that in today’s financial climate they are likely to pay far more than most bank savings accounts are offering. Many companies provide investors with annual returns of 6% or more. It is for this reason, that corporate bonds are such a popular choice with those wanting to make their money work for them instead of sitting in a bank working for someone else.
As Kenny observes, “Over time, corporate bonds have offered investors attractive returns for the relevant risks.” Adding that, “The corporate bond arena offers investors a full menu of options in terms of finding the risk and return combination that suits them best. Corporate bonds are therefore a core component of diversified, income-oriented portfolios.”
How to Buy Corporate Bonds
1. Through a broker
A broker is a professional buyer and seller of bonds who takes a commission or charges a fee for each transaction he conducts on your behalf. As well as providing you access to the bond market, a broker can also offer you advice on which bonds to buy.
2. Through a mutual fund
A mutual fund is a way to invest in a broad selection of different company bonds. In effect, it pools an investment sum from many individuals and is run by a financial expert who charges a fee for his services. Investors who buy into the fund will have their money returned to them at the end of an agreed period with interest paid.
Mutual funds are a good way to spread the risk across different industries or countries. Some will specialise in riskier markets, such as companies based in developing countries, others will offer lower returns as the money is invested in larger corporations which are less likely to default.
3. Buying bonds directly from a company
Corporate bonds can also be purchased directly from a company. Not only does this remove any fees or commission taken by a ‘middle-man’, but it also offers a more direct and clearer route to investing.
A number of companies and investors are now taking advantage of this direct form of bond purchase.
The Prague-based business, AG CHEMI GROUP, for example, is currently seeking investment partners of all sizes to help finance its Nanomaterials Research Centre, as well as a production line for the restructuring of industrial polymers at the nanoscale.
While AG CHEMI GROUP (who host this website) has been successfully importing and exporting chemical raw materials since 1994, the business is now looking to expand into supplying nanomaterials to manufacturing. It is already patenting two of its innovations for nanostructuring polymers, as well as testing its own design of nanosilver additives with antiviral and antibacterial properties.
Combining the company’s business experience, industry contacts, and nanotechnology know-how should lead to significant long-term gains.
The short-term returns are also notable, with corporate bonds available that offer returns at 6.8% p.a. payable in monthly or yearly instalments.
With investment sums starting from as little as 10,000 Czech crowns, it is easy to start investing. You can also work out your returns with this simple online calculator.
“Although no corporate bond is entirely risk-free,” notes Marc Davis, a financial expert and Forbes contributor, “… highly-rated corporate bonds could reasonably assure a steady income stream over the life of the bond.”