Corporate bonds – the income alternative

Corporate bonds have featured in the press lately as a potential income alternative to low-interest deposit accounts. What are they and why are they seen as an answer?

Just as governments raise finance by issuing government bonds, corporations do too in the form of corporate bonds. Compared to government bonds, the risk of a company defaulting on their responsibilities is higher. This risk means a corporate bond will pay a higher yield than the equivalent government bond. There are also degrees of risk within the corporate bond spectrum; these range from lower-risk investment-grade bonds, issued by blue-chip organisations seen as more secure, to high-risk junk bonds of a more speculative nature.

As with any investment, diversification is essential. Don’t invest in only one company and don’t restrict yourself to one business sector. This way, if a company defaults, the impact is diluted across your portfolio.

Few people have enough capital to play the bond markets while achieving a suitable spread of risk. This is why most people will pool their investment with other like-minded investors by investing in a corporate bond fund managed by professionals. You can also include these funds in an ISA to produce a tax-free income.

If you wish to explore corporate bonds as a way of providing income it is important you seek professional advice – contact us to find out more.

The value of investments can fall as well as rise and you can get back less than you invested.

 

Copyright Finance Speak Spring 2009