We explain the basics behind fixed income investments and corporate bonds
Fixed income investments generally provide investors with more secure and stable investments than equity, property or other growth orientated assets.
A very common form of fixed income investment is a bond. The Australian Government, state governments and many of Australia’s largest companies borrow money by issuing bonds.
If a company wants to borrow money for a number of years it can do so in one of two ways; it can borrow from a bank, or it can issue corporate bonds.
Bonds are basically IOUs with the returns to investors determined by two factors:
1. The face value that is paid when the bond matures
2. The steady stream of income paid over the life of the bond defined by the coupon.
Read more about Why Companies Issue Bonds
Corporate bonds are not all alike. Their key features, which can differ from one bond to another, include:
The Bond Issuer
Companies can vary in their financial strength, depending on the business they are in and how much money they have already borrowed. All XTBs are over top ASX-listed companies, brands you know and trust.
The Face Value
This is the nominal value of the bond which the company promises to pay when it matures. All XTBs have a face value of $100.
This is the annual income that is paid to investors, expressed as a percentage of the face value.
When bonds first existed in paper, investors would detach the coupon for that payment and take it to the company’s bank to receive payment.
These income payments are usually paid semi-annually or quarterly and occur on set dates. This means bonds allow investors to accurately plan when and how much income they will receive from their investments.
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A bond with a $100 face value and a 5% coupon, paid semi-annually will provide two payments of $2.50 each year.
Note: In general, a riskier company will issue bonds that have a higher coupon than a less risky company.
Fixed or Floating Coupon Bonds
The asset class that includes bonds is ‘fixed income’.
It is true that many bonds have a coupon that is fixed. However, some have a ‘floating’ coupon which pegged to an industry benchmark. These floating-rate bonds offer investors a fixed margin above that benchmark.
A floating rate coupon bond may track the Bank Bill Swap Rate (BBSW) and offer investors 0.75% above this rate.
In this case the coupon would be BBSW + 0.75%.
Check out the full range of available XTBs, including fixed and floating rate bonds.
Term to Maturity (or Tenor)
This is the length of time from the bond being issued until its maturity, when the face value and the final coupon are paid to investors.
Capital Structure Ranking
When you invest in a company, it is important to understand where you sit in the capital structure. In the event the company gets into financial trouble, some bonds will be paid out before others and before shareholders.
XTBs cover senior corporate bonds which sit above subordinated bonds, which are above hybrid securities which sit above equities. The lower the ranking in the capital structure a security is, the higher the risk and potential reward associated with that security.
An important practical and day-to-day implication of where senior and subordinated bonds, hybrids and shares sit in the capital ranking of a company is the price stability or volatility of the security in the market. Senior bond prices/yields are generally far less volatile than securities below them in the structure such as shares and hybrids.
This is important when it comes to the stability of your diversified portfolio.
Read more about capital structure and it’s importance to investors.
View our infographic – Your Guide to Corporate Bonds: A world of opportunity
Read more insights into the corporate bond market in our Insights centre.