Government & Corporate Bonds
Corporate bonds are issued by companies to raise capital, typically for expanding their business. The bonds are issued to bondholders in exchange for a set interest payment known as the coupon. The coupon may be paid during the period the bond is active, or there may be an enhanced maturity value. The bonds have a fixed maturity date at which point the company which issued the bonds is expected to return the initial capital to the bondholder and any enhanced premium if applicable.
Bonds are traded during their active period on bond markets and prices may fluctuate upwards and downwards. The bondholder does not have any rights to share in the company profits or dividends. Depending on whether the bond is subordinated debt, senior debt or secured debt, will determine the level of risk associated with the bond. The higher the risk of the bond, the higher the bond coupon rate.
Traditionally, government bonds or sovereign debt was seen as less risky than corporate bonds. But that has been turned upside down recently with ten year Irish sovereign debt providing yields of 14% in July 2011, while in August 2010 IBM issued $1.5bn of three year bonds at an incredible 1% coupon rate.
Why Invest In Bonds?
Typically when equity markets enter a bear market, investors move across to safer assets such as bonds. In times of equity market stress, bond markets and especially government bond markets have seen an increase in prices and reduction in yields, as demand increases for these safer assets. However, during the sovereign debt crisis in 2011, we have seen large increases in default risk across a number of euro countries. Bonds provide diversification in an investment portfolio and are a significant asset class for fund managers.
Investors can access bond markets through secondary markets via their stock broking account. Primary markets are where institutional investors buy the bonds at time of issuance. Another way of investing in bonds is through a managed fund where the fund invests in a wide range of either corporate or government bonds or both. These managed funds will give exposure to various types of bonds that the individual investor would find to replicate in their own portfolio if dealing direct