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How to invest in corporate bonds

by , 20 March 2014

Bonds are a way for governments or companies to borrow money. By investing in bonds, the government or company will pay you interest for holding the bond and at the end of the bond's term, pay you the capital amount. Let's take a closer look at how corporate bonds work and how you can invest in them…

What are corporate bonds and why should you invest in them?

Bonds issued by governments are generally the safest bonds, Phil Oakley in Money Week explains…

This is because a government is less likely to default on its debt than a company is. But like most things in investment, it’s all to do with risk and reward.

With a higher risk premium attached, companies will pay higher interest (or yield) than government bonds.

This is because companies can’t turn on the money presses to ensure they pay back their dues. They need to make sure the company turns a profit and generates cash.

And with corporate bonds, this means being able to pay the interest and repay the capital when a bond matures (when the term of the loan is up).

Bondholders get paid interest before shareholders get a dividend. And if a company went bust, bondholders have a prior claim on a company’s assets.

And it’s this that makes corporate bonds less risky than shares.

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The best way to get exposure to corporate bonds in SA

Buying into corporate bonds in SA is only for wealthy investors. But you can gain access to corporate bonds by investing in unit trusts that invest in a range of different bonds.

There are a wide array of bond funds available. These funds invest in government and corporate bonds. And they will hold a portion in cash.

When you invest in bond funds, you’ll receive the equivalent interest rate pay out. This can be quarterly or twice a year.

You can invest in bonds funds from as little as R200 a month.

And because bonds are less risky than investing in shares, bond funds are low to medium risk.

So there you have it, how you can invest in corporate bonds.

 



How to invest in corporate bonds
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