Lending money to a company
A corporate bond is one way for a company to raise money from
investors to finance business activities. In return for your money,
the company issuing the bonds promises to pay you interest at
regular intervals and return the money you've invested on the maturity date.
Corporate bonds generally offer higher returns than cash, government bonds or
deposits, but less than shares. Corporate bonds are generally less risky
than shares issued by the same company.
What are corporate
By investing in a corporate bond, you are lending money to a
business in return for interest payments.
Corporate bonds can provide regular interest payments
(instalments), which may be fixed or variable (floating) in line
with movements in a benchmark interest rate. These instalments are
known as 'coupon payments'.
Coupon payments are backed by the bond issuer's cash flow or in
some cases, the company's physical assets. See our bonds webpage for more
Different to shares
Buying corporate bonds is different to buying shares in a
company. If you buy shares, you become a part owner of the
business, may receive dividends and will share in any growth in the
company. As a bond holder, you are considered a 'creditor' and your
return is limited to interest payments and the return of the money
Different to government bonds
A corporate bond is not the same as a government bond, which is
a low-risk investment. See Australian Government
bonds for more information about Commonwealth Government
Securities (CGS), which are issued by the Commonwealth of
Bond or debenture?
A debenture is a type of corporate bond. To be called a
debenture, the bond must be secured against property. A debenture
is always a fixed rate investment. See unlisted
debentures, secured & unsecured notes for more
Some other debt securities are types of corporate bonds, but are
more complex investments and carry higher risks. See hybrid
securities and subordinated notes for more
Buying corporate bonds
You can buy corporate bonds through a public offer (the primary
market) or through a securities exchange (the secondary
If you buy corporate bonds through a public offer you will
receive a prospectus and you can apply
directly to buy the bonds. Public offers are usually advertised in
newspapers and financial publications.
Before you invest, read the prospectus thoroughly so you
understand the features and risks of the investment.
You can buy (and sell) some corporate bonds on the Australian
Securities Exchange (ASX) after they have already been issued in
the primary market. If you buy bonds on the ASX you will pay the
market price, which may be higher or lower than the face value of
the bond. You will also pay a transaction fee to your broker.
See how bonds are valued for more
If you are buying corporate bonds on the secondary market, the
prospectus may be out of date. Check the issuing company's website
or the ASX
for the latest information on the bonds.
The pros and cons of corporate
Here are some advantages and disadvantages of investing in
Bonds versus shares
Corporate bonds are generally less risky than shares issued by
the same company. If the company fails and can't pay all its debts,
bond holders generally rank higher than share holders.
Corporate bonds can offer a stream of coupon payments and the
return of the principal on maturity. In contrast, the payment of
share dividends is at the discretion of the company.
The price of corporate bond are usually less volatile than shares for the same
company. Buying shares and bonds from the same company is not diversification.
If held to maturity, and subject to the issuer not defaulting on
the promised repayments, you will receive regular interest
It is possible to design a relatively stable stream of income
from corporate bonds by investing in bonds from different companies
that have different maturity dates.
Corporate bonds are unlikely to give you capital growth as they are generally not
designed to increase in value during the time you have the
Selling the bond before maturity
If you don't want to hold the bond until the maturity date and
decide to sell it on a secondary market, you may get a lower price
than the face value.
There may also be fewer potential buyers for the bond. This can
be a problem if you need to get your money back quickly.
Assessing the risks of a
The return offered by a corporate bond is not the only way to
assess the investment. It's also important to understand the
The main risk with corporate bonds is that you may not receive
interest payments or get your money back if the company issuing the
bonds goes out of business. This is known as 'credit
Consider the business environment the company operates
- Which country is it in?
- What is the outlook (future demand, cost pressures and
competition) for the industries it operates in?
- How good are the management and/or owners?
You can also asses a company's ability to meet its financial
obligations by reviewing the pro forma financial information in the
prospectus (or if you buy bonds after they are first issued, the
company's most recent financial statements). Ideally, the company
should have low levels of debt and plenty of cash to service
Find out the following information about the company so you can
assess its credit risk:
- Financial performance over time - Look for
strong earnings, profitability and cash flow
- Ability to pay interest on debts (interest coverage
ratio) - The company should earn enough from its business
operations to cover interest payments on money it borrows. Make
sure that the company's earnings are comfortably larger than net
- Level of debt or leverage (gearing ratio) - A
good indicator is a ratio that measures total liabilities divided
by shareholder equity. The higher this ratio, the more highly
leveraged the company.
- Defaults on debt obligations - Check whether
the company has defaulted on any current or previous debt
obligations or if there is a significant amount of debt that will
be maturing soon.
Security and ranking
When a company becomes insolvent, its assets may have to be
sold, with the proceeds distributed to everyone who has a stake in
the company. Read the prospectus to see what assets the bonds are
secured against or if they're unsecured. Also check your ranking in
the list of creditors.
Prepayment (or early redemption) risk
This is the risk that the issuer will redeem the bonds early if
interest rates fall and the market price goes up. If this happens,
you will be paid the face value of the bonds (you may have paid
more for them or they may be worth more on the secondary
The prospectus should tell you the circumstances under which
early redemption is possible.
Investment check list
for corporate bonds
Use this checklist to help you decide whether corporate bonds
are the right investment for you. The prospectus for the bonds as
well as ASIC's guide to investing in corporate bonds will
help you answer these questions.
- When does the bond mature?
- What is the length of the bonds' term in years?
- Is interest paid at a fixed or floating rate?
- If they are floating rate bonds, do you understand how the
interest is calculated?
- How often will you be paid interest?
- Does the company have the financial capacity to pay you
interest and return your principal at maturity?
- Do you understand that you may lose money if you sell your
bonds on the market?
- Are the bonds secured or unsecured?
- Where do you stand in relation to other creditors if the
company issuing the bonds can't repay its debts?
- Can the company issuing the bonds buy them back before the
It's important that you carefully assess the
features, terms and conditions of each corporate bond, as the risks
can vary. Seek financial advice from a licensed adviser if you need
further information or guidance on how corporate bonds can be used
to meet your investment needs.
Last updated: 12 Dec 2018