![]() In this case, the “face value” of each bond is $1,000. The corporation might decide to sell 1,000 bonds to investors for $1,000 each. Suppose a corporation wants to build a new manufacturing plant for $1 million and decides to issue a bond offering to help pay for the plant. Like a loan, a bond pays interest periodically and repays the principal at a stated time, known as maturity. If an investor buys a corporate bond, the investor is lending the corporation money. An investor who buys a government bond is lending the government money. Governments, corporations and municipalities issue bonds when they need capital. This makes bonds an attractive idea to professionals who have been entrusted to manage other peoples money responsibly, such as pension fund administrators.A bond is a loan that the bond purchaser, or bondholder, makes to the bond issuer. Buying corporate bonds is objectively more conservative than buying shares.This is a key objective of many investors. Corporate bonds generate a ‘premium return’ above savings accounts, which have been proven to beat inflation over the long run. ![]() They appeal to both the cautious and adventurous (See: Junk Bonds). Corporate bonds are suitable for a wider range of investors than stocks and shares.What makes these simple loan agreements so special? Do they deserve their status as a core asset class in many portfolios? They’re a default investment choice do feature in most basic investment portfolios. Why do investors favour corporate bonds?Ĭorporate bonds are like the ‘Coca Cola of investments’. In 2013, US telecom giant Verizon issued corporate bonds worth more than the economy of Libya produced in the same year ($49 billion). When these investors come together, they can loan vast sums of money with relative ease. The corporate bond markets, on the other hand, are home to thousands of participants with very deep pockets. Just like any investor, banks are wary of placing too many eggs in a single basket. That’s twice as much as Goldman Sachs makes in fee income each year. Taking Apple Inc as an example, its debts total $80 billion. We might think of banks as gigantic organisations, but the amount of credit that multinationals need would overwhelm a single bank or even a consortium of them. They are usually not prepared to extend large, long term loans for companies to finance themselves indefinitely. However, banks are risk-averse when lending their own capital and are only prepared to extend financing up to a limit. Virtually all corporations have a ‘revolving credit facility’, which acts like a giant overdraft to ensure they have cash in a crisis. Usually, the answer is that the company already has finance arranged with their bank. So why do companies choose to issue corporate bonds to demanding investors rather than talking to their bank? Instead of negotiating with ‘the market’, the finer details can be agreed over lunch with a group of bank managers. Why don’t corporations take out bank loans instead?īank loans feel more straight-forward than issuing corporate bonds. If investors accept the deal, the transaction is done and the company receives the much-needed capital to invest in the business.Īfter the issue, the company is obligated to pay the stated interest (known as a coupon payment) and the final sum to the bondholders.Ĭheck out the definition of bond and the definition of corporate bond for more information. When companies ‘issue bonds’, they go out to the market and propose a total size and interest rate. Please perform your own wider research before making any investment.Ĭorporate bonds are an effective way for medium to large corporations to raise finance. I’ll explain what to invest in now to get exposure to corporate bonds. I’ve created this ultimate guide to highlight the strengths of this humble workhorse. This guide to investing in corporate bonds will explain why corporate bonds are nevertheless one of the most popular types of investments.įor armchair investors to pension managers the corporate bond has been generating income for investment portfolios for centuries. The Best Finance Books for Non-Financial ManagersĬorporate bonds are perhaps not the most exciting investment opportunity available (see: how to invest in land or investing in commodities).The Best Merger & Acquisitions (M&A) Books.The Best Gold & Silver Investment Books.The Best Quantitative and Technical Analysis Books.The Best Internal & External Audit Books.The Best Financial Statement Analysis Books.The Best Financial Risk Management Books.The Best Financial & Management Accounting Books.The Best Fraud & Forensic Accounting Books.The Best Estate Planning & Inheritance Books.The Best Budgeting & Money Management Books.The Best Land & Forestry Investment Books.Compare UK Equity Crowdfunding Platforms.
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