What are corporate bonds?
work in the same way as government bonds. A company issues a bond as a way to raise money. When you buy corporate bonds, you’re lending the issuing company money.
Corporate bonds are a way for companies to raise money without issuing more shares or going to the bank.
It tends to be the largest listed companies and government-owned parastatals that issue corporate bonds in South Africa.
One thing you need to bear in mind with corporate bonds is the risks are higher than government bonds. In other words, there’s a higher chance you won’t get your money back.
Types of corporate bonds
Here are some of the most popular corporate bonds:
Debentures are corporate bonds that are secured against company assets. So they work in the same way as your home loan is secured against your house.
These are the safest kind of corporate bonds and tend to pay a lower interest rate due to this.
Preference shares are a combination of equity and debt. They also tend to have fixed terms, like bonds and pay out a fixed interest payment (dividend) through their life. There are a number of different types of preference shares
Corporate bonds come with different risks, depending on the company and type of bond. Credit rating agencies give ratings to corporate bonds so you can use these to judge the ‘safety’ of a bond.
Generally speaking, the higher the rate of interest, the higher the risk.
How to buy corporate bonds
If you want to invest in corporate bonds, you can invest through a unit trust focusing on corporate bonds.
Or you can speak to your stock broker about investing directly in different corporate bonds. You’d have to invest in a number of different bonds with different maturities to give yourself diversification if you opt to invest this way.
So there you have it. Why you should consider corporate bonds if you’re looking for a higher yield than government bonds offer.
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