The ins and outs of corporate bonds

Julie Brownlee, Fsp Invest, 27 May. 2014

Tags: corporate bonds, corporate bonds, what are corporate bonds, how corporate bonds work, buy corporate bonds, bonds,

Bonds offer investors a way of generating an income. This is the element that attracts investors to bonds. You get two types of bonds: Government and corporate. So what are corporate bonds? And how can you invest in them? Let’s take a closer look…

What is a corporate bond?

All businesses need money to fund certain things. One of the main reasons companies list is because they can easily generate money from selling shares in their business.

But by selling shares, you sell a piece of your business, Phil Oakley in Money Week explains. So how else can a company borrow money?

It could go to the bank to borrow money. And many companies go this route. But a company could also decide to borrow money from investors instead.

Companies do this by issuing bonds (corporate bonds) that trade on the stock market.

How do corporate bonds work?

Let’s take a look at an example to show how corporate bonds work…

Company ABC needs R100 million to fund a new factory. So the company decides to issue corporate bonds. The company divides the amount up into individual bonds. Let’s say of R1,000 each. Investors can then buy these.

The company pays a rate of interest over the period of the bond. Say 6% over the next ten years. At the end of the period, the company will pay the R1,000 back.

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How to buy corporate bonds

If you wanted to buy corporate bonds, you can do this through your stockbroker. But in most cases, the investment needed to buy corporate bonds is quite hefty. A more affordable route is through a bond unit trust.

So there you have it, the ins and outs of corporate bonds.

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