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Corporate bonds are IOUs issues by companies when they need to raise cash. They are an alternative source of finances to shares, but instead of then owning part of the company and sharing the profits (which is fairly risky) with a bond you are promised your money back on a certain date with a regular fixed interest payment or "coupon" (originally called that because the bond certificate had coupons attached that could be torn off and redeemed on certain dates) Good solvent companies will pay the coupons and the original sum. The main risk with bonds is that if a company becomes insolvent it may default on their payments.

Bonds can be traded after they have been issued and may have a value above or below the issue price so the coupon (yield) may be more or less than the original published yield and you may make a loss or gain if you hold to matturity. The Gross Redemption Yield is the effective percentage yield you will get if you do hang on to them until expiry (This value is available in financial publications and web-sites) The value of the bond depends on how the apparent solvency, credit rating and bank interests rates have changes since issue

A simple rule of investing states that the higher the risk of an investment the higher the return. This is the Risk Premium: The amount you get paid for taking the extra risk. So if you want to make lots of money you need to take more risks. It is however possible to reduce the risk, without reducing the return, by building a balanced portfolio. The risk of buying a single bond (or share) is high with many possible unknown influences on the price. Buying two bonds results in some reduction of risk because a drop in one price may not affect the other one adversely. Many bonds are highly correlated to each other, so having two bonds in the same field (e.g. BP and Shell) does not reduce the risk as much as two bonds in unrelated industries (e.g. BP and Lloyds) Mixing bonds with other asset-classes will also improve volatility of the over-all portfolio (e.g. mixing shares, bonds, property and gold bars)

Individual bonds can be purchased via a broker, in the same way you might buy shares, stocks etc. or you can buy bond-funds, unit trusts, investment trusts or ETFs (or Zero Dividend Preference Shares which are a more obscure bond-like alternative) To diversify risk, as described above, you need exposure to a range of different bonds; if you want to buy many bonds in a relatively small portfolio you would incur a lot of charges

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