by Costas Chryanthou

Created on: July 18, 2010   Last Updated: July 19, 2010

Corporate bonds are issued by corporations in order to raise finance from investors and financial institutions. In the U.K leading companies on the FTSE stock market have listings for corporate bonds. Leading companies tend to be able to raise hundreds of millions of Pounds or even Billions of Pounds from interested parties. Large companies such as Vodafone, British Telecom, National Grid are examples of big companies in the U.K that have raised money using corporate bonds.

In terms of corporate finance this is a  useful tool for companies to raise money as they are tied into paying the holders of the debt a coupon payment. The coupon payment can be arranged to be paid twice annually or on an annual basis. The coupon rate is what attracts investors to a particular corporate bond issue. The coupon tends to be higher than the yields of most if not all U,K gilts and treasury stock due to the increased risk of the company. Most U.K government stock have a coupon rate of around 3-4%, where as it is possible to find companies corporate bonds paying a coupon rate of between 5-11% each year. 

The advantages for investors holding corporate bonds is that the corporate bonds act like a charge against a companies assets. What I mean by this is that the corporate bond holder is effectively holding a debt instrument of the company. This means that if the company goes bust, the bond holder can effectively take a claim against the companies assets. The coupon rate is fixed and the company must have sufficient cash in order to pay the corporate bonds. Also whilst the coupon rate is fixed for a fixed duration of time, some issues are irredeemable which means that the bond holder will receive the same amount of bond interest forever. The long term dated bonds tend to have a higher coupon rate. 

There are differences between ordinary stock and corporate bonds. The ordinary stock holders are subject to unsystematic stock market volatility where as the price of bonds is linked to U,Interest base rates and also the credit ratings. In months and years where the ordinary stock holder, reads news of low profits or losses the ordinary stock holder will receive a reduced or no dividend payments. By comparison the bond interest in the first place must be paid. Also the corporate bond holders are first in the queue for their coupon rates ahead of preferred stock and ordinary stock holders.

The disadvantages of owning the corporate bonds, is that when the corporation makes increased profits their risk is fixed to the coupon rate as agreed, and they can not be paid more. Also the coupon rate is paid twice yearly or on an annual basis. Secondly the base rates of the U,K or the U.S might rise higher than the coupon rate of a corporate bond, and as such the investors return is reduced. This scenario will cause some investors to sell their holdings in corporate bonds causing the price of the corporate bond traded to fall slightly in value.

The process of buying corporate bonds is a straightforward process of buying them through a stock broker.  I feel that in conclusion to corporate bonds, that the rate of return definitely is higher compared to retail bank saving products, as well as treasury stock.

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