What is a corporate bond?
A company issues bonds as a way of raising funds. They borrow from investors in the form of bonds, making it a form of debt. When you purchase a bond, the issuer is legally obliged to pay you regular interest and at the bond’s maturity, pay back the face value of the bond to you.
Can you give me names of companies who have issued bonds?
Bonds are issued by many companies – from well-known companies such as BHP, Qantas and Commonwealth Bank to smaller companies such as G8 Education and Praeco.
Over 300 bonds are available via FIIG’s DirectBonds Service. Wholesale qualified investors can also invest in foreign currency denominated bonds, including USD, GBP and Euro bonds.
You can find out more about our DirectBonds service here (link to DirectBonds web page)
How do corporate bonds work?
When you purchase a bond, the issuer is legally obliged to pay you regular interest (referred to as coupons) and at the bond’s maturity, the face value of the bond (which is the price the bond was issued at – usually $100) must be paid back to you.
Will I get my money back?
A bond issuer has a legal obligation to pay back the face of the bond at its maturity. Provided the bond issuer remains solvent, you will be paid the face value of the bond when it matures.
Default rates for bonds that have an investment grade credit rating is just over 1% over a five year term until maturity.
Corporate Bonds are for fixed terms – what happens if I want to sell before the term ends?
If you want to sell your bond before its maturity date, you can sell it in the Over The Counter market via a bond broker such as FIIG.
Are there different types of bonds?
Yes there are different types of bonds. The most common types of bonds are:
Fixed rate bonds pay the same amount of interest throughout the life of the bond and is set at the time of issue.
Fixed rate bonds have an inverse relationship to interest rates – if interest rates rise, the price of a fixed rate bond will fall. The reverse is also true so if interest rates fall, the price of these bonds will rise. This is because the only way this fixed rate bonds can reflect changes in the market is through price movements.
It’s important to remember, that the price of a bond may fluctuate but this doesn’t affect the interest/coupon rate of the bond.
Fixed rate bonds allow you to plan as you get the same coupon rate for the life of the bond.
Floating rate Floating rate bonds pay a variable coupon that is linked to a variable benchmark, such as the bank bill swap rate (BBSW). The BBSW is simply the bond markets cash rate.
The margin over the benchmark is fixed at the time of issue – the floating rate comes in because the BBSW can fluctuate. The BBSW reflects the markets view on interest rates – for example, if the market believes interest rates will rise, the BBSW will also rise.
Floating rate notes have less interest rate risk as the coupons rise and fall in line with markets expectations on interest rates.
Inflation linked bonds Inflation linked bonds are bonds that are linked to the Consumer Prices Index or inflation. The most common type of inflation linked bond is the Capital Index Bond (CIB) which has a fixed coupon.
CIBs usually have a low coupon rate but the principal is linked to the headline inflation rate – this means that every quarter the principal increases with inflation and the coupon is then calculated on the increased principal amount.
How are corporate bonds different to term deposits
There are two main differences between corporate bonds and term deposits. Firstly, term deposits are only issued by banks and other financial institutions, whilst corporate bonds are issued by a more diverse range of companies across different sectors including retail, technology, transport and infrastructure. Secondly, term deposits must be held until they mature, whilst corporate bonds can be bought and sold when it suits you any time prior to maturity
How are corporate bonds different to shares?
When you purchase shares in a company, you become a part owner of that company and there’s no certainty of income via dividends. With corporate bonds, you lend money to the company that issues the bond and it is legally required to pay you regular interest and repay the face value of the bond when the bond matures. This means that investing in a company’s bond is a lower risk than owning its equity or shares.
Another major difference between shares and bonds is that shares are generally traded on an open exchange such as the ASX, whereas the majority of corporate bonds are traded on the OTC market.
I own hybrids – are they a type of bond?
Hybrids is a broad classification for a group of securities used by a variety of Australian companies to raise money that combine both debt and equity characteristics. These securities sit below senior debt and above equity in the capital structure.
Can I invest directly in bonds issued in other currencies?
Wholesale qualified investors can invest in foreign currency denominated bonds, including USD, GBP and Euro bonds. To find out if you qualify as a wholesale investor, click here (link to article on Wholesale investors)
Can bonds provide protection from rising inflation or rising interest rates?
Not all bonds are equally affected by rising interest rates or inflation. Examples of bonds that offer protection from inflation and rising interest rates include:
- Short-dated money market securities
- Floating rate notes
- Inflation linked bonds for longer term protection against inflation.
What does the term ‘investment grade' mean in credit rating terms?
All bonds with a minimum S&P rating of BBB (or equivalent) are regarded as being investment grade. Investment grade credit is usually more liquid than noninvestment grade credit.