Corporate bonds are investments that receive interest, like a loan (and sometimes additional benefits, like stock), but the repayments depend on how successful the company’s business is.

You can trust corporate bonds

Investing in corporate bonds is one of the most secure financial investments you can make because they use your money to fund businesses and projects you know will eventually make money.

If you invest £250 into a bond for Tesco, then Tesco will use that cash to help them grow their stores or start new branches.

Suppose Tesco makes more profit as a result of this investment. In that case, they’ll return your capital plus interest – usually, between 5-10% interest per year depending on the length of time you invest.

You can control corporate bonds

The great thing about corporate bonds is choosing how much risk you take. Tesco has a history of good financials and strong management.

You might then want to keep your money in their bond for five years because there’s less chance they’ll default than if you were to invest in the bond of a start-up business with a bit of track record.

On the other hand, if Tesco were struggling financially, maybe due to recent losses or harsh trading conditions, it doesn’t make sense to tie up your money long-term as their prospects are likely to remain poor.

So investing this amount of money wouldn’t be profitable.

An alternative to savings accounts

Savers are instead encouraged to invest in corporate bonds because they offer a much better rate of return than your typical savings account, plus you get the bonus of receiving interest on top.

Even if you do need access to your cash (e.g. an emergency expense or buying a house), then at least you’ll be able to make some money out of your investment first by cashing in your bond when it matures, which gives you time to find the right home for your funds.

Making a side income

You don’t have to keep all of the money in corporate bonds as a savings account – you can take your money out and use it day-to-day if you want to.

The good thing about corporate bonds is that they’re UK Government-backed. There’s no capital gains tax on the interest, so it’s an excellent way for anyone looking to build a side income from investments to put their money into – whether you want to buy a new car, book a holiday or have some cash to spend.

Different types of corporate bonds

The most common type of corporate bond is called a ‘coupon’. A coupon signifies the rate of interest being paid by the company on your investment and will either be fixed(e.g. 5%) or variable (e.g. 1%).

A fixed-rate is ideal for an investor because you know exactly how much interest to expect each year. In contrast, a variable rate would increase or decrease depending on the company’s financial performance.

If you’re looking at investing in a corporate bond, always check what type of coupon it has so that you take into account whether or not this will affect your return.

Additional Benefits

In addition to receiving interest payments from your investment, there can sometimes be fringe benefits attached to corporate bonds.

Such as being entitled to free shares when they’re first issued plus the chance of getting preferential treatment when it comes to things like applying for loans or insuring your car.

Controlling your cash

Suppose you don’t need to make an immediate withdrawal from your money because you’ve already got enough funds in savings or investments for now.

However, unlike other forms of investment where you might have to wait at least five years before cashing in, with corporate bonds, you can sell them whenever you like and reinvest the money in something else, which gives you a lot of flexibility and choice.

Link to bonds for more information