WiseAlpha
WiseAlpha
Oct 25, 2017 · 3 min read

Knowing the difference could save or make you money.

A bond in its simplest form is a loan issued by a government, company or other institution. Instead of taking the loan out through a bank, the borrower approaches investors for capital.

The borrower promises to pay a fixed rate of interest or coupon for a fixed period at regular intervals until maturity, upon which they will repay the original capital back to the investors (bondholders).

Companies often issue bonds as a way of financing expansion, rather than issuing further shares.

Within the bond market, there are different types of bonds.

Companies issue bonds when they want to invest in machinery, new staff and research etc.

Corporate Bonds

Corporate Bonds are issued by companies and can have varying degrees of risk and thus different rates of returns.

Investment grade or high grade bonds are bonds that refer to large corporates which are viewed as having a low risk of default and will normally be rated by S&P between BBB and AA. Returns currently are between 0.5% and 3.0%.

All investments carry risk. It is a measure of the variability of returns from an investment. Risks include credit risk, interest rate risk, liquidity risk, economic risk, systemic risk and maturity risk.

Senior secured bonds refer to a segment of the bond market which is extremely popular with specialised funds and high net worth investors. Many large corporates in the UK, particularly brand name companies issue bonds in this part of the bond market. The terms of these bonds vary from 5–7 years.

These bonds carry more risk than government bonds or high grade bonds as the company can have between 30% and 50% of it’s overall value in the form of debt (i.e. the bonds and other borrowings) with the remainder of the company’s value represented by equity or subordinated capital. However returns can be much higher in the range of 5–8%.

Eager readers will have noticed this is an Australian example. The same is true in the UK

Senior Secured bonds have security protections for investors and in the event of the company going bust of falling into financial difficulty bond investors are first in line to reclaim their capital back versus other stakeholders with claims. In this instance, investors will be paid before equity investors, and before those with unsecured bonds or loans.

High yield bonds (which are commonly known in the investment industry as unsecured or second ranking bonds) are not first in line for a repayment if the company has financial difficulty and the risk to an investor’s capital can be much higher.

However, this higher risk tends to be compensated by higher coupons or returns.

High Yield bonds do however have greater scope for price appreciation in the event of an upgrade in the rating of a bond, or during an economic upturn, or after improved financial performance at the issuing company.

Senior Secured and High Yield corporate bonds can therefore be an interesting way to generate potentially more attractive and stable income returns while diversifying traditional portfolios which are weighted to stocks, government bonds and cash savings accounts.

Gilts or UK Government bonds

These are bonds issued by the UK government in order to finance public spending. UK Gilts are rated AA by S&P and Aa2 by Moody’s and are viewed as having an extremely low risk of default.

Consequently, these types of bond have the lowest yields or returns of any bond type in the UK for a given maturity.

At the time of writing, 2 year gilts have a return or yield of 0.46% and 30 year gilts have a yield of 1.92%.

Read more on the WiseAlpha Website.


Visit the WiseAlpha Market to learn more about available investment opportunities. More information on the benefits of corporate bonds are available in our report here.

As with all investments your capital is at risk. WiseAlpha members purchase Notes which are fractions of individual corporate bonds.

See full Risk Statement at www.wisealpha.com

WiseAlphateam

The online investment platform liberating a multi-trillion market for the masses.

WiseAlpha

Written by

WiseAlpha

The online investment platform liberating a multi-trillion market for the masses.

WiseAlphateam

The online investment platform liberating a multi-trillion market for the masses.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade