What they are
They are a way for a corporation to raise some money for further expansion of a business. Sometimes to expand in a business they might need more money than the bank are prepared to lend and this is where they turn to corporate bonds. They can put the security of the bond as actual assets that they own or they need to have a strong forecast of future business.
You will need to have a minimum to invest in corporate bonds of $1000; the risk is higher than what you get with a government bond. The term of the bond can vary but it is usually over a year, if it is less than a year the bond is normally called a commercial paper. The maturity date will be specified when you are looking into the purchase and any coupon (interest payments) and the frequency will also be stated. It is important to look at this data because it should be this that gives you the basis to the potential of choosing the corporate bonds that you want to invest in.
As with any investment you will need to declare the coupon payments that you receive to the tax man, and pay any money due.
You can purchase corporate bonds in a number of different places these include:
- Direct, an investment platform
It is possible to purchase the bonds individually yourself from a platform, but you will want to make sure that you are fully aware of the history of the bond and the projected future before you make a purchase. If you want to sell the bond before the maturity date it is potential that you will secure a good deal for your bond sale. You will not be paying commission on an annual basis for a fund manager to do the work for you. You will have to pay for the sales and purchases that you make; these can vary depending on where you invest.
You can also apply to a bond fund and this is where a manager buys a selection of different bonds and spreads your money out. The disadvantage with this is if you want your money back before the end date you have the potential to lose a large portion of your capital.
Corporate bonds can be a great investment opportunity but you will need to do your homework on the company that you are considering to purchase bonds from. If you are going to head in the direction of a broker then make sure that you are confident in their services before you part with your investment money. Do your homework; learn as much as you can with the amount that they will charge you and the amount of potential return that you will get with regard to the coupon value and the maturity date of the corporation bonds that they have suggested.
It is possible to sell before the maturity date, but be warned that you might not get the capital back that you put in. Corporate bonds are a higher risk and this is shown in the coupons that you receive, the higher the coupon value, and potential for a higher risk option.