What are corporate bonds and are they a good investment?

If you are looking for an investment that offers a stable income while reducing the risk of capital losses, corporate bonds are one of the ways you can invest in companies while maintaining the appropriate degree of risk for your risk appetite.

Let’s get to know more about corporate bonds. We’ll define what corporate bonds are, the types of corporate bonds, how they work, and the risks and rewards that come with investing in this type of product.

What are corporate bonds?

A corporate bond is a type of bond. If you’re wondering what is a bond is, these are fixed-income investments issued by governments and corporations representing the loan made by the investor.

A corporate bond is a type of bond issued by companies directly to investors when they want to raise capital. The company borrows money from investors for a certain period with a promise to repay the principal plus interest.

Corporate bonds are considered low-risk investments because they are backed by an organization’s ability to repay its debts through its prospective revenue. As such, it is among the favored investment products as it generates steady income.

Characteristics of corporate bonds

Let us go through the key features of corporate bonds to help you better understand them.

Issuer

A corporate bond is issued by a company or corporation to borrow funds from investors. The issuing company affects other factors of the bond, such as the degree of risk associated with it and interest rates offered.

Coupon rate

This is the annual interest rate the issuer promises to pay the investor. This is often expressed as a percentage of the bond’s face value.

Face value

A bond’s face value is the amount of money it will be worth upon maturity. This is used to calculate the coupon rate and payments the investor receives.

Maturity date

This is the date on which the issuer is scheduled to repay the investor the principal – the bond’s face value. Corporate bonds usually have a maturity period of five years for shorter terms and up to 12 years for longer terms.

Credit rating

Bonds are assigned credit ratings by credit rating agencies like Fitch, Moody’s, and Standard and Poor’s. The ratings are based on the issuing company’s creditworthiness. Higher-rated bonds typically carry lower risk while lower-rated bonds are considered riskier.

Two types of corporate bonds

Although corporate bonds are generally low risk, some bonds carry more risk than others. To help investors make the right decision, bonds are reviewed and graded based on the issuing company’s creditworthiness.

Corporate bonds fall into two classifications:

Investment-grade bonds

Corporate bonds issued by companies with a rating of AAA to BBB are considered high-quality bonds. This means that they carry the smallest degree of risk.

Junk bonds

Junk bonds are issued by companies with credit ratings lower than BBB. These companies may be deemed to be struggling financially, and thus, have a high risk of defaulting on their loans.

To make these bonds more attractive, companies offer higher interest rates to compensate for the higher degree of risk.

How are corporate bonds in the Philippines bought and sold?

Like most types of investments, corporate bonds come with pros and cons. It is best to understand the risks and opportunities of global corporate bonds to help you decide if it is a good investment for you.

Benefits

Stable income

Apart from zero-coupon bonds, corporate bonds provide stable annual or semi-annual income for investors. Coupon payments are interest payments, so investors receive the same amount every time, unlike with other investments like stocks where income fluctuates with the company’s financial performance.

Diversify your portfolio

Bonds are a great way to balance out riskier investments in your portfolio.

Additionally, corporate bonds let you invest in companies from various economic sectors, which helps add diversity to your investment portfolio. Corporate bonds examples include bonds issued by transportation, public utilities, and financial services companies.

Higher yield potential

Corporate bonds offer higher yield potential than government bonds. However, do keep in mind that this is because they carry a higher default risk than government bonds.

Higher liquidity

This type of bond is quite liquid. You can easily sell your bonds in the secondary market. However, your success in selling and getting returns is dependent on risk factors affecting the price of bonds.

Risks

Corporate bonds are sensitive to interest and inflation rate risks. While they are more stable than other types of investments, their value can fluctuate with the market conditions.

The price of bonds has an inverse relationship with interest rates. So, when interest rates increase, bond prices go down, making it harder to liquidate with a profit.

Meanwhile, long-term bonds with a fixed income are not cushioned against high inflation rates.

Ready to invest in corporate bonds?

So, are corporate bonds a good investment?

If strategized well, corporate bonds can be an excellent way to earn a stable income while protecting your capital. The Metrobank Corporate Bond Fund is great for investors who are risk-averse or are looking for low-risk investments to include in their portfolio.

Do you have any questions about government investments? Do not hesitate to reach out to us!