Tutorial: Corporate Bonds


What are corporate bonds?

Corporate bonds are debentures issued by industrial companies from all around the world (e.g. companies from Austria, Central and Eastern Europe (CEE), USA, Japan, India, China and many more). The array of companies is as vast as their sectors, with a certain focus on automobile, construction, financial service providers, energy, telecommunication and food. Corporate bonds are used for funding debt capital requirements.

How do corporate bonds work?

Corporate bonds are issued as fixed- or floating-rate securities or with a special interest structure. They work like other bonds (see tuturial on bonds for more information).

An important criterion of evaluation for a corporate bond is the rating it gets from independent rating agencies. The lower the rating, the riskier the investment – and the higher the interest rate. For international bonds in foreign currency the exchange rate risk also has to be considered.

Your benefits

With corporate bonds investors decide in favour of the variety and know-how of domestic and international companies. Investors have the chance to benefit from above-average interest payments, however the issuer risk has to be considered.

Your advantages

  • Investment in well-known companies.
  • Investors have the chance to benefit from above-average interest rates.
  • When purchasing company bonds in foreign currency, chance to benefit from currency appreciation.

Risks you should be aware of

  • Change of market interest rates and credit rating of the issuer may lead to price fluctuations and capital loss in case of sale before maturity date.
  • The redemption at 100% of nominal amount by the issuer only applies at maturity.
  • The currency risk may lead to capital loss for interest payments and redemption.
  • Economic fluctuations in CEE countries may be higher than in established economies.

How do corporate bonds react to…

… rising interest rates?
Corporate bonds with fixed interest rate fall when interest rates are rising. Corporate bonds with floating interest rate, on the other hand, benefit from rising interest rates. Given that these bonds ("floaters") have their interest rate periodically adjusted to a referential rate such as the EURIBOR, an increase in the level of interest rates also means a rising interest rate for the bonds. The price of the bond tends to oscillate around face value.

… stable interest rates?
In the case of stable interest rates, neither the price nor the coupon of corporate bonds changes (if other criteria, e.g. the rating of the issuer, stays unchanged).

… falling interest rates?
Corporate bonds with fixed interest rate increase when interest rates are falling. Falling interest rates, on the other hand, have a negative impact on corporate bonds with floating interest rate. Given that these bonds ("floaters") have their interest rate periodically adjusted to a referential rate such as the EURIBOR, a decrease in the level of interest rates also means a falling interest rate for the bonds. The price of the bond tends to oscillate around face value.