What
is a Corporate Bond?
In the wake of the recession the UK has
become a lot more ‘stock market aware’
for want of a better term. Financial terms
and jargon that nobody really ever thought
about before (‘short selling’
anyone? How about ‘credit default’
and ‘sub-prime’?) are now very
much within our sphere of awareness. Accordingly,
as the markets recover, people are suddenly
aware of a whole range of investment options
that they previously did not know existed.
Another one of these financial terms which
has become commonplace (particularly in
the sports world) is ‘corporate bonds’.
A corporate bond is, in essence, a small
loan offered by a customer to a company,
so that the company can raise a large sum
of money very quickly. In return for the
customer paying for this ‘bond’
and therefore giving the company cash, the
customer also receives a certain rate of
interest for a period of years, and then
the full original price of the bond.
So far, so simple, corporate bonds, however,
can be something of a risky proposition
as they are a form of debt. Companies offer
corporate bonds when they need to raise
money quickly, in an ideal world this is
when they’re looking to invest and
make the most of an opportunity in the markets,
in the real world (as in the case of Manchester
United) they often offer corporate bonds
to raise money to cover existing debts.
The nightmare scenario with corporate bonds
is (for the company) that not enough people
will buy them and they won’t raise
the money they need and (for the customer)
that the company will not have enough cash
to pay the interest, and/or the full sum
at the end of the agreement. Should the
company happen to go out of business, bond
holders get nothing.
However, as far as bonds are concerned it
is not all doom and gloom, there are a wide
range of companies out there who have offered
corporate bonds on very certain financial
footing and an enormous volume of government
bonds out there. Government bonds operate
in the same way as corporate bonds but generally
offer a slightly lower, but more certain,
interest rate.
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