One risk is that interest rates may rise after you have locked your money away, which would make the rate you earn less attractive.
Buying a corporate bond means lending a company money in return for interest. The company could be anything from a supermarket to an insurance firm.
The bond will have a maturity date, at which point your original investment is returned.
A corporate bond’s price can vary, meaning that the “yield” – as opposed to the interest rate as a percentage of your original money, which is called the “coupon” – can go up and down.
Consider a bond originally priced at £100, with an annual interest rate of 5pc and maturing in 10 years’ time. Demand for the bond could send the price to £110, but the interest payment stays the same at £5. For a new buyer, however, the bond will yield 4.5pc – this is the “running yield”.
However, that buyer faces a capital loss of £10 at maturity, eroding the effective yield over its remaining life to 3.8pc a year. This is the “yield to maturity”.
Most corporate bonds are traded on the stock market, so investors should be able to sell their holding at any time. You will see them listed with names such as “Standard Chartered Plc 5.125% 06/06/34”, which tells you the coupon and maturity date.