Corporate bonds explained
What are bonds?
Corporate bonds (or retail bonds) are issued by companies to raise money if it is cheaper than issuing further shares. They represent a loan from you to the company and are considered higher risk than gilts, which are issued by the government.
Why invest in bonds?
Bonds generate an income for you through interest on your capital.
The issuing company promises to pay a fixed rate of interest (‘coupon’) for a fixed period at regular intervals until maturity, upon which it will repay the original loan or capital back to you, the investors. Interest can be either at a fixed rate or at a floating rate relative to the bond.
You may also come across zero-coupon bonds which pay no interest but which are issued at a discount to the value on maturity, creating a capital gain.
Types of bonds
Bonds are categorised according to their term or maturity date:
Short-maturity bond = 5 years
Medium-maturity bond = 5-15 years
Long-maturity bond = 15 years or more
If a company gets wound up, bonds have higher priority than shares, however you need to assess the risk associated with the particular issue (rather than the company), by looking at the company’s ability to service its debts. Most corporate bonds are rated for risk by credit rating agencies, such as Standard & Poor's, Moody's or Fitch.
If you want to sell a bond before its redemption date, you may get back less than you originally invested.
Interest on bonds is paid gross, but is liable for Income Tax. This makes bonds particularly attractive to non-tax payers. You don’t have to pay Capital Gains Tax on some qualifying bonds.