There are many reasons to invest in corporate bonds. Most investors don’t realise how important the corporate bond market is to Australian companies and the rest of the world. It’s an important source of finance and almost all of Australia’s top 50 ASX listed companies’ issue or invest in corporate bonds.
Wondering whether to invest in corporate bonds? Here are 10 reasons to consider:
1. Income – Interest income, known as the coupon, is set at first issue and can be paid monthly, quarterly or semi-annually. Payment dates depend on when the bonds are issued and can be any business day of the year.
2. Capital returned at maturity – Bonds are issued with a $100 face value and the company issuing the bonds guarantees to repay you face value at maturity.
3. Certainty – Corporate bonds are legal obligations. The company must pay interest and return principal when they say they are going to otherwise the company can be in default and there are serious consequences such as wind up or liquidation.
For example, if you invest in a CBA bond, the CBA guarantees it will pay you. Thus, the credit quality of the bond issuer is vitally important. Do you have confidence in the company for the term of the bond?
4. For diversification – A wide range of companies, including companies not listed on the ASX and internationally based companies issue Australian dollar denominated corporate bonds. Investing in these corporate bonds can aid diversification.
5. Corporate bonds can pay three types of interest income:
- Fixed rate of interest, locking in future income absolutely and also taking on interest rate risk. These corporate bonds are sought after when the market expects interest rates will decline.
- Floating rate, tied to a benchmark, which moves up and down. That means your income will also move up and down with the expectation of interest rates. These bonds are particularly useful if you think interest rates will go up.
- Inflation linked, tied to the Consumer Price Index, so protect against inflation.
6. Corporate bonds can be bought and sold in foreign currencies – making them attractive to investors that have USD, EUR, GBP as well as many other currencies.
7. Corporate bonds offer the opportunity for higher than stated returns – Because corporate bonds trade in the secondary market, prices can go above and below $100 face value. So, investors can sell corporate bonds before maturity, at higher prices than what they were purchased for to make higher than expected returns. Note: Investors that need to sell corporate bonds before maturity may also incur a loss if the price has declined.
8. Investment grade corporate bonds are generally low risk, liquid investments.
9. Corporate bonds are the next best investment to term deposits on a risk versus return basis. Investing in investment grade corporate bonds means investors take on extra risk for extra return.
10. There are four ways to invest in corporate bonds:
- Via an ETF. This is a pooled investment. ETFs can be passive or active and are benchmarked to an index. They have the lowest minimum investment amounts of $500. See What is an ETF? for more information.
- Through a Managed Fund. There are many corporate bond managed funds. See our Managed Fund Finder. Managed fund managers try to outperform a benchmark and have various success achieving their aims. Minimum investment amounts differ from $1,000 to $500,000 but are usually between $10,000 to $25,000. Managers buy and sell corporate bonds and try and beat a minimum stated return. Fees are usually higher and there can also be performance fees.
- Via the ASX. The ASX has a handful of bonds available but includes approximately 30 Exchange Traded Bonds, know as XTBs.
- Through a bond broker or dealer. Typically, the lowest value per bond is A$10,000. Investors can access unique high yield and high risk deals by investing direct. See our Bond Portfolios page for sample bonds and a list of bond brokers.