Corporate Bonds

updated: January 21, 2010

Corporate bonds are loans issued by companies.  Investors lend money to those companies by purchasing the bonds on which a fixed rate of interest is paid for a fixed period at the end of which the investor expects that their capital will be repaid.  Companies issue such loans to fund future developments or investment (take-over) opportunities.

The amount of interest paid by the company will be based on the current level of interest rates and the risk that the company might default on one or more interest payments or go bust and not return the investor’s capital.

The proportion of an investor’s ‘free assets’ (ie those available for investment) that are held in fixed interest investments (ie gilts, index-linked gilts and corporate bonds) is generally accepted as being too low for the majority of UK investors. 

Many investors seem to have portfolios that consist of cash deposits on the one hand and share portfolios on the other, with little in between to bring stability to the investment process. 

When stock markets have shown good returns for a number of years, investors move some of their cash deposits into shares in the hope of making capital gains and when markets fall investors sell their shares and put what is left of their money back on deposit where it is ‘safe’.

It is generally agreed that the most important ingredient for investment success is not the actual investment selection, or market timing, but getting the asset allocation right.  That is, how much to invest in cash, gilts and other fixed interest bonds, property, equities and alternative investments.

To obtain further information please click here for our pdf Guide to Corporate Bonds .