What Are Corporate Bonds? | How to Buy them in the UK | IG UK

If you’re looking to buy corporate bonds in London, it is better to be prepared. 

Here we will go through some of the basics of buying corporate bonds and look at things such as what they are, the different types available and current prevailing interest rates. 

By understanding these factors, you can make informed decisions when seeking advice on your options for bond investments in London.

Think of them as similar to a loan that an individual might take out from their bank or financial institution. 

A principal amount is borrowed by one party from another with an agreement that it will be paid back with interest upon the date stipulated by the contract. 

Corporate bonds are no different in this respect except that they are typically issued by large, established companies rather than the government. 

It is in contrast to bonds issued by governments, which are generally called “sovereign bonds” due to their debt obligations being backed by the taxing power of a national government.

For investors who don’t wish to take on complex investments, mutual funds also buy corporate bonds with varying structures. 

These allow them to purchase multiple securities at once and benefit from reduced fees since management is handled by the fund manager rather than the individual investor finding specific bond tokens for purchase.

Before you can fully understand how bonds work or when it’s the best time to invest in them, it helps to know what type of bond you’re interested in buying, so let us explain some of the different kinds that are available in London. 

There are two main types of corporate bonds: “debentures” and “preference shares”. These can be broken into specified categories, including convertible bonds, cumulative preference shares, capital appreciation debentures and zero-coupon bonds.

What is a “Debenture”?

A debenture is an unsecured loan issued by a company to interested buyers. 

Often these loans are short term, so they may mature after anywhere from one month to five years, depending on how long it takes for the investor to get their money back with interest attached. 

The other key difference between this type of bond and others, such as preference shares or pre-paid coupons, is that the interest rate is not fixed and will fluctuate depending on prevailing market conditions.

What are “Preference Shares”?

These corporate bonds represent a type of long-term investment opportunity in UK companies. 

They should be distinguished from investments such as regular shares, which only indicate an ownership stake without any promise for revenue down the line or other security beyond what might come from having one’s name attached to a publicly-traded company. 

Preference shares typically pay dividends at specified intervals and payout according to an agreed formula known as “the waterfall” (since it looks like a cascading waterfall from above). 

This formula controls how much each preference share gets paid until all have been paid before any money is given to the holders of common shares.

What are “Convertible Bonds”?

This type of bond is designed to convert to either preference shares or ordinary shares in the company at some point before maturity. 

The decision as to what type of share it will become entirely rests with the investor since convertible bonds are not automatically converted into another form when they reach a certain age or level of debt outstanding. 

It can be seen as both an advantage and disadvantage since it allows flexibility now but leaves uncertainty about what your investment will be worth down the line.

When you purchase corporate bonds in London, whether through a broker or by yourself online, you must know where interest rates are at the time of purchase. 

Suppose you’re interested in buying bonds but don’t know where to begin. 

In that case, it’s a good idea to familiarise yourself with the current market conditions before taking any action or engaging with any financial institution that promises returns far above what is ordinarily available on the market.

Contact your broker today or link to Saxo and learn how you can profit from trading corporate bonds in London.