The corporate debt market is one of the largest financial markets in the world, providing the means for large corporations to raise money directly from investors to fund their operations.
While smaller organisations are usually limited to bank and/or non-bank lenders to acquire funding, larger organisations can bypass such intermediaries and raise funds directly from investors via debt capital markets.
Unlike raising capital via an equity issuance which dilutes the ownership of existing shareholders, a company raising capital via debt markets can obtain the funds it needs without changing the ownership structure.
Additionally, given many corporate bonds are issued at a fixed coupon, the company’s management also has greater certainty over its obligations to fixed-income investors. Regular interest or coupon payments are typically made quarterly or semi-annually, enabling companies to effectively plan financing requirements, while investors know exactly how much they will receive and when.
It is this certainty which makes corporate bonds and other corporate fixed-income securities so attractive for both the issuer, and investors.
Types of Coupon Payments
There are various types of coupon payments available including fixed-rate, floating rate, inflation-linked and credit-linked.
While fixed-rate coupons are paid at the same rate regardless of what happens to interest rates, floating-rate coupons fluctuate as interest rates change. Similarly, inflation-linked coupon payments fluctuate in line with inflation rate changes, while credit-linked coupon payments are paid based on a specific company’s credit performance or quality.
Irrespective of the coupon type, payments are generally made regularly and secured for the entire life of the bond or fixed-income security, often referred to as the term. When the term ends, the security matures and investors usually receive their investment back at par value, although this isn’t always the case and the exact amount returned depends on various factors.
The price of the security has a face value, however sometimes securities are issued below their face value, which is often called below par.
Current Yield, and Yield to Maturity
The current yield provides investors with an indication of how much a security is paying to investors and is calculated by dividing the annual coupon payment by the current market value. While the coupon payment \never changes on a fixed rate security, given the market price of all securities fluctuate (even fixed interest coupons), so will the yield.
If a bond or fixed-income security is held until maturity, then the expected return throughout the term is referred to as yield to maturity which reflects the total expected return, including what price was paid when purchased.
Know the Risks
Corporate fixed-income securities including bonds are generally less volatile than equities, but they aren’t without risk. From credit risk to market risk and inflation risk, there are many considerations to be aware of.
For more information about these risks but also the benefits which corporate fixed-income securities can provide, contact an adviser at the Australian Bond Exchange today.
Disclaimer: Australian Bond Exchange Pty Ltd ACN 605 038 935 AFSL 484453 (ABE). This article is intended to provide general information of an educational nature only. It does not constitute the provision of personal advice and does not take into account your personal objectives, financial situation or needs. Before investing with ABE, you should consider the appropriateness of the investment to your particular financial and taxation situation and consider obtaining independent advice before making an investment. Examples in this article are for illustration purposes only and are not a recommendation to buy, sell or hold a particular investment. ABE makes no representation or guarantee as to the availability of a bond with the characteristics described in this article or that an investment made by you will generate the returns in the illustration. Past performance is not an indication of future performance. Investing with ABE is subject to our Client Services and Custody Agreement Terms and Conditions and Financial Services Guide.