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A corporate bond is a fixed interest instrument issued by a company (corporation). They are similar to other bonds such as those issued by governments and local authorities. Although there are various types of corporate bonds the basic variety is a straight, fixed interest bond with a set redemption date.

The idea of investing into any bond is to fix your rate of return whilst interest rates, such as with a bank deposit, are falling.

The rates of interest obtainable on a corporate bond are higher than a government bond as they are perceived to be more risky. And obviously, depending on the financial strength of the issuing corporation the risk to the interest payments and the redemption payment will vary enormously. This risk is rated by companies such as Moodys the lowest risk being AAA.

The two important factors about bonds in general are yield and redemption yield. Taking a bond with a fixed coupon (annual interest rate) the only variable is the price of the bond. As the price goes up so the yield will decrease and as the price goes down so the yield will increase. The formula that represents this is Yield=Coupon/Pricex100. Of course once you have purchased the bond at a certain price your personal yield is fixed.

If interest rates (bank rate) go down, the yield of any bond would have to come down as well. As we know the coupon is fixed the only other number that can move is the bond price. Using the above formula you can see that the bond price must move up. Conversely if interest rates in general go up, then the price of bonds comes down.

Note: bonds prices are quoted as pounds, or what ever currency you are using, per cent (per hundred) so a £100 face value bond would have a par value (starting price) of £100 (£100%).

Hopefully this example will help clarify the above:

ABC Company has issued a bond paying a fixed rate of interest (coupon) of 5% and with a redemption (repayment) in the year 2013.

This bond will pay 5% or £5 for every £100 nominal of stock every year until 2013 when the nominal value will be repaid.

The par value (price) of this bond is £100% (£100 for £100 nominal).

When this bond is traded on the stock market its price is most unlikely to be £100%. So on a vary simple basis, what is the market price likely to be?

First we establish the interest we would expect on a risk free account, for example we could use the bank rate which we'll assume is 4%. All things being equal (which they are not) the yield from our theoretical bond should also be 4%. Using the formula Y=C/Px100 we can calculate that the market price should be £125%

Possibly the best way to invest in corporate bonds is via an ETF (Exchange Traded Fund). An ETF is traded on the stock exchange just like any other share. As such it could be incorporated in an ISA (Individual Savings Account).