Corporate Bonds
Introduction
A corporate bond is basically a loan to a company. Most cases, you get interest payment as long as you hold the security. The amount of interest you will get (called the coupon) is expressed as a percentage of the nominal value. If you hold a bond to the end of its term, you should get back the nominal value.
But you don’t have to hold a security for its whole term, because you can buy and sell fixed-interest securities on the stock market. In this case, the amount you get back will be the market price not the nominal value. If the nominal value or market price that you get back is higher than the amount you paid, you’ll make a gain (profit). If it’s lower, you’ll make a loss.
Risk
Corporate securities are generally less risky than shares, however, the following risk factors could affect the prices of corporate bonds:
• Company profitability - if a company runs into difficulties it may not be able to make the interest payments or pay back your money at the end of the term – you could lose the whole amount invested.
• Interest rates – changes in interest rates can result in a fall (or rise) in the value of corporate bonds.
• Inflation expectation – if inflation rises, the buying power of your return on a bond falls.
It’s a good idea to invest in securities from a number of different companies so that your investment isn’t tied to the fortunes of one company.