In the midst of unprecedented turmoil in the financial markets, there are some fantastic opportunities for investors. Of particular interest are corporate bonds, as they offer similar or better returns than shares in the current climate, and represent less of a risk for investors.

Corporate bonds are essentially IOU notes written by listed companies who need to raise funds. Bonds usually have a nominal value of 100GBP, although their actual market price can vary depending on the performance of the company concerned.

A fixed interest rate is attached to the loan, which is expressed in currency rather than percentage terms. This is known as the coupon rate. For example, you might have a bond with a nominal value of 100GBP offering a coupon rate of eight pounds per year for the duration of the loan.

At the moment, there are a lot of companies looking to raise funds to lessen the effects of the recession, which means increased competition for investment. This means that many firms are offering higher than average coupon rates in an attempt to attract investors.

Corporate bonds are safer than shares in a number of ways. One reason for this is that interest payments have to be paid to creditors before dividends are paid to investor, so you will receive an income even if the firm does not turn a profit that year.

The main risk involved with corporate bonds is that of the company who issued the bonds going bust. While bondholders could expect to be the first people to be paid in the event of the liquidation of a firm, there is no guarantee that there will be enough money to go round.

With things being the way they are, a company is statistically much more likely to go out of business than at any point in the last eighteen years, making individual bonds something of a risky investment. One way to spread this risk is to invest in a corporate bond fund.

A corporate bond fund is a pooled investment in several different bonds, made on behalf of its investors by a fund manager. In the event of one of the companies in the fund going under, the loss will be negated to a certain extent by the positive performance of the other bonds in the fund.

    Posted in Investing from Investor on 2. Feb. 2010