Corporate bonds are complex investments, the performance of which depends on numerous variables. Anyone who buys a bond is granting a company a loan. The relevance of this type of investment has increased continuously in recent years. In 2018, for example, there were bonds from German companies with a value of around 313.5 billion euros in circulation – more than ever before.
- In a corporate bond, like a loan, a company borrows money for a certain period of time, for which the creditor receives interest payments.
- Both the market interest rate and the company’s creditworthiness have a significant impact on the value of the bond.
- In general, corporate bonds are considered relatively safe.
What are corporate bonds?
The bonds of issuable companies are considered to be corporate bonds . This type of debt security represents an alternative to ordinary loans from a financial institution. Companies use them to ensure or increase their liquidity. A bond is a fixed-interest security that grants the respective creditor the right to repayment on the one hand and to payment of the fixed interest on the other. In the Prime Standard (stock exchange segment with the highest transparency standard), all companies that:
- require at least a financing volume of 100 million euros
- comply with the international accounting standard IFRS
- prove a high creditworthiness or a good rating
You will only find corporate bonds from domestic companies on the national bond market. The international bond market, on the other hand, includes corporate bonds from issuers from all over the world. In addition to the USA, the European Union, Japan, India and China are among the largest markets for such bonds. Corporate bonds are typical in the following sectors, among others:
- construction industry
- Financial services
- Power supply
The most important key figures for a corporate bond
Fixed key figures describe the value of a corporate bond. In this context, it is important to pay particular attention to the following variables:
- Yield: Annual interest until the end of the term, variable due to external factors such as market interest rates
- Coupon: Regular payment (annually, semi-annually or quarterly) of the interest set in advance
- Nominal value: the nominal amount of money that the issuer will repay at the end of the term
- Market value: Current value of the corporate bond, given as a percentage of the nominal value, primarily before interest rate level
- Remaining term: time until the end of the term or until the bond is repaid
- Bond volume: total amount of bonds issued by the issuer
How do corporate bonds work?
As with stocks , the price depends on supply and demand. The price for issuing and redeeming the bond is usually 100 percent. The price usually changes as soon as the bond starts trading. If the prices rise above the nominal value (“above par”), this indicates strong demand. If, on the other hand, the bond falls below 100 percent (“below par”), this indicates weak or falling demand. According to abbreviationfinder, LTCB stands for Long-Term Corporate Bond.
In addition to the development of market interest rates, the credit rating of the respective company also has a significant influence on the stock market price. The rating of the creditworthiness of economic entities and financial instruments is carried out by rating agencies. A downgrading of the rating usually leads to significant price losses. However, there are often no assessments, especially for the bonds of smaller companies.
How safe are corporate bonds?
Corporate bonds are an attractive alternative to a savings account at a bank. After all, significantly higher returns can be achieved with this type of investment . Fixed interest coupons of four percent or more are not uncommon. However, this better interest rate is also associated with an increased risk. In contrast to a government bond , the debtor is a company that is liable with all of its assets; there is usually no separate protection.
While corporate bonds are generally considered to be relatively safe, there is of course always a risk of bankruptcy . In this case, your bond loses all of its value and you lose all of the money invested. In order to keep the risk of a total loss as low as possible, it is recommended, for example:
- to forego individual purchases and instead buy (exchange-traded) funds
- to invest exclusively in companies with very good credit ratings
- prefers to select corporate bonds with high liquidity
Where can I buy corporate bonds?
Corporate bonds are traded on a decentralized basis via various marketplaces, such as banks and stock exchanges . Every bond has an international securities identification number (ISIN) or a securities identification number (WKN). This makes it easier to assign the securities and must be specified when purchasing the bond. To trade corporate bonds, interested parties need a securities account – for example with a bank or an online broker .
Compared to stocks, the return on corporate bonds is usually lower. As a result, with this type of investment it is all the more important to pay attention to order fees as well as custody and transaction costs . This is especially true for very active investors who buy or sell relatively often. You can find out what else is important when choosing a depot and what the conditions of different providers are in the depot comparison from Sportingology.