Companies can raise money with corporate bonds. This mostly comes from institutional investors, but private investors can also buy the bonds. What you should be aware of.
The European Central Bank does it, and so does the US Federal Reserve – and so can you: invest in corporate bonds. But what are you getting into and how does the investment work?
We explain exactly what corporate bonds are, who publishes them, how they work – and how much risk you are taking with them.
What are corporate bonds?
Corporate bonds, also known as “corporate bonds” Bondsthat companies give out when they need capital – to buy another company, for example.
As an investor, you give the company something to do with it Credit. In return, you will receive a fixed interest payment – and ideally your invested money back at the end of the term.
How does a corporate bond work?
Corporate bonds have one pre-determined termwhich can be up to 10, 15 or even 20 years. During this time, the company, i.e. the bond debtor, pays you as the bondholder for the risk that you took with the purchase. You receive interest chargeswhich are also determined in advance. These are called Kupon.
The coupon is usually available yearly, sometimes every six months or every quarter. After the end of the term, you will also receive money backthat you loaned to the company. Provided that the company does not go bankrupt in the meantime.
Who issues corporate bonds?
Corporate bonds in this country are from German and international companies as well as foreign subsidiaries of German companies. Depending on the size of the issuing company, a distinction is made between Industrieanleihen and Mittelstand bonds.
Industrial bonds are predominantly issued by companies in the industrial, retail and transport sectors. The grand total of all bonds, too Issue volume or Bond volume called, is usually larger than in the case of medium-sized bonds issued by medium-sized or family businesses. The maturities of industrial bonds are also longer.
For companies, bonds can be a worthwhile alternative to bank loans or to issue shares. This is the case if a loan from the bank is difficult or expensive to get, or the company is not a stock corporation.
How much return do corporate bonds bring?
With corporate bonds, you can get a achieve higher returns than with government bonds. This is because companies have a higher risk of default (see below for more on the risks). Read here how to buy government bonds.
If the company reliably pays the promised interest and gives you your money back at the end of the term, you can sometimes reap a substantial profit.
How high it turns out depends a lot on the Issuer rating away. Because the Creditworthiness of a company affects the interest rate. The following applies: the better the rating, the lower the risk of default and the lower the return.
Given the extreme low interest rate policy of the European Central Bank lies that Yield level with reputable and creditworthy debtors usually only slightly above that of overnight or savings book deposits.
Who bonds from debtors with poor credit ratings – so-called high-yield bonds – can, on the other hand, expect more returns. However, the risk of failure is often greater here.
How safe are corporate bonds?
Corporate bonds come with a variety of risks. Probably the most important thing: in the case of bonds, there is no deposit protection. If the company becomes insolvent, there is a theoretical threat Total loss of the invested money. In insolvency proceedings, however, investors often get at least part of it back.
In addition, the Courses of corporate bonds fluctuate during the term – influenced for example by the general economic situation, but also developments in the company itself. This Course risk is higher, the longer the term to maturity is.
However, there is also an opportunity in this: If the prices increase in the meantime, it could be worthwhile to sell the corporate bonds during the term for a additional return to achieve.
This in turn works better if the company’s creditworthiness is good and the issue volume is high. Then the company should be consistently liquid, so that you can sell your shares at any time. Otherwise there is a Liquidity risk – and you may have to sell on less favorable terms to get rid of the paper at all.
If you invest in bonds from companies outside the European currency area, you also have to buy and sell shares Currency risk.
Where do I buy corporate bonds?
You can get corporate bonds every day through the The stock market to buy. For this you need one as with stocks Depot at a bank or a depository provider. There may be fees for this.
The actual purchase, the so-called order, also costs money. The high of Order fee often depends on the order volume. More about buying bonds read here.
What should I look out for when buying?
Before investing in corporate bonds, consider: how much risk you are willing to take. Keep in mind: A higher interest rate than usual on the market means a higher risk, i.e. a lower creditworthiness of the company. This makes a failure more likely.
It’s best to take a look at those too operational indicators of a company and make sure that it has a solid record and sufficient amounts equity capital Is provided.
And as with all investments, the following also applies to bonds: Don’t put everything on one cardbut buy bonds from different issuers from different countries and industries.
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