What You Need To Know About Investing In Corporate Bonds
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Corporate bonds are a useful way for companies to raise the funds needed for growth and expansion. In return for the money paid for corporate bonds companies will pay a high interest return to investors and also pay back the principal when the bonds mature. Corporate bonds are riskier than government bonds but they can be quite profitable. Many companies can offer guaranteed high interest returns of as much as 15% per annum on the initial investment. This means if you can afford to invest £5,000 then you could earn £750 on interest alone in the first year of the bond.
Buying and Selling Corporate Bonds
You can buy corporate bonds in standard denominations of £1,000, £5,000 and £10,000. Both short term and long term maturities are offered.
You can make a profit by selling your corporate bonds on the open market before they mature. A good time to buy bonds is when the interest rates are high. This means the seller has to discount the bonds in order to make them more attractive to investors. At this point you should be able to buy bonds at less than their face value. There are two ways in which you can then profit from these bonds. As you bought them cheaply, when the bond matures you will get back more than what you originally paid for them. Also you could wait until interest rates drop again and sell the bonds on the market again at a profit.
Main Risks
The main risk of investing in corporate bonds is that the company issuing the bonds goes out of business. This will mean that you will not be able to cash in your bond when it matures and it will be worthless on the open market. One way to avoid this risk is to thoroughly investigate any company you are thinking of investing in to ensure they are financially stable. You can do this by looking on the Standard & Poor’s, Moody’s Investors Service and Fitch Ratings. This lists all of the companies floating bonds on the market in terms of credit quality. The higher the rating the more likely it is that you will get the full repayment of principal and interest on your bonds.
Other risks include the interest rates rises. If you are forced to sell your bonds before they mature then you could lose out on your initial investment.
Investment Limitations
Most corporate bonds require an initial investment period of six months. This means you cannot sell or redeem your bonds during this time. You will need a valid bank account in order to invest in corporate bonds as in most cases the interest and principal earned will be paid directly into the bank account nominated by you. Few companies will be willing to send you checks or alternate payment methods as these have additional administration costs.
Article Source: Articlelogy.com
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