Corporate bonds have always been available to investors traded over-the-counter. However, for most investors, trading corporate bonds in this way is out of our reach. If you have millions of dollars to invest, you can choose from a wide range of corporate bonds issued by successful Australian companies. Whilst they may trade in parcels of $50,000, more commonly its $500,000 at a time. This leaves them inaccessible for most investors.
Because OTC corporate bonds aren’t traded on exchanges, there is no pricing transparency. Investors are beholden to their broker who quotes prices on a transaction-by-transaction basis. This effectively makes fees and commissions difficult to decipher.
XTBs offer greater flexibility and transparency
There is a way for everybody to access the returns from corporate bonds, irrespective of the amount you have to invest. If you’re looking for a low risk investment that provides an attractive and stable income, XTBs might be the answer.
Easy to access, cost effective and flexible
XTBs trade in small to large parcel sizes. This means they are accessible to all investors – not just those with very large portfolios. Because XTBs are traded on the ASX, they can easily be bought and sold at any time, so you can access your money at any time. Like any investment, there may be fees associated with buying, holding or selling.
What are corporate bonds?
If a company wants to borrow money to fund growth, or other investments, it has two options; borrow from a bank, or issue bonds.
Corporate bonds are basically IOUs that:
- Pay back the loan when the bond matures – known as the ‘principal’ or ‘face value’.
- Deliver a steady stream of income, normally paid quarterly or semi-annually throughout the life of the bond – known as the coupon.
Corporate bonds are difficult to access for most individual investors due to the high minimum investment – normally $500,000.
XTBs (or Exchange Traded Bond units), are securities traded on the Australian Stock Exchange (ASX) that give you exposure to the benefits of individual corporate bonds. You receive the same coupons and principal payment that you’d receive if you were to invest directly in a corporate bond.
- Coupons = regular, fixed income paid for the lifetime of the bond
- Principal payment = the amount you lend the company, paid back to you at maturity of the bond.