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Corporate Bonds

Corporate Bonds are similar to Government Bonds (Gilts), and work in much the same way. Corporate Bonds are issued by companies as opposed to Governments. The company borrows money by issuing bonds which people buy for example at £100 per bond. The company pays interest to you at the coupon rate for a fixed term. If the coupon is 5% and the term 10 years you will receive 5% interest each year for the next 10 years when the company will repay you the £100.

Companies issue bonds as a cheaper form of borrowing than a bank loan and often offer better returns than Government Gilts. They have to offer better returns because of the significant risk of the company going bankrupt. Remember there are many cases of even large, multinational companies folding and it is much greater than the risk of a Government being unable to repay its debt.

Also see -

Government Bonds