Corporate bonds let investors lend to companies in return for regular interest payments. They sit between cash and equities on the risk ladder and have re-rated significantly as base rates rose from 2022 onward.

Key takeaways

  • Investment-grade bonds are issued by stronger credits.
  • High-Yield ('junk') bonds compensate for higher Default Risk.
  • Bond fund prices fall when yields rise.
  • ETFs and OEICs simplify Diversification.
  • Bonds can hedge Equity drawdowns - but not always (2022 was a notable exception).

How bonds work

A bond pays a coupon over its life and returns Face Value at Maturity, unless the issuer defaults.

Investment grade vs high yield

S&P, Moody's and Fitch rate credits. Investment grade (BBB- or above) is lower risk; high yield carries default risk.

How UK investors access bonds

Funds and ETFs (e.g. iShares Core Corporate Bond, Allianz Strategic Bond) are the simplest route. Direct bonds trade on LSE retail board ORB and via Brokers.

What this means for UK investors

Corporate bonds can play an income and diversification role inside a Stocks and Shares ISA or SIPP, particularly for investors approaching retirement.

Risks to watch

  • Interest-rate sensitivity.
  • Credit and default risk.
  • Liquidity gaps in stressed markets.
  • Inflation eroding fixed coupons.