Corporate Bonds UK: A Practical Guide for Investors

UK corporate bonds may not be the sexiest investments on the planet, but they can play a crucial role in a diversified strategy. These products can inject a degree of stability, provide an attractive income, and lower the overall level of risk being taken in a portfolio. This also means they can be regarded as safe havens during times of global uncertainty when equity investments are more volatile. Such qualities appeal to risk-averse investors, as well as those wanting an additional revenue stream or to broaden their asset allocations.

Here we give an overview of what you need to know before deciding whether to buy UK corporate bonds.

What are corporate bonds and how do they work?

The best way to describe a corporate bond is an IOU that you receive from a company in exchange for lending it money. Businesses may need this cash injection to fund expansion plans, embrace new ventures or to underpin existing operations. To do so, they may issue bonds. Buying a bond means lending money in exchange for a fixed rate of interest over a pre-determined period, as well as your original investment returned on a specified future date.

Terms to understand

There are a variety of terms used to describe the ways bonds work. While they may seem confusing, they’re actually quite straightforward to understand.

• Credit rating — Every corporate bond’s creditworthiness will be analysed by a ratings agency. They will assess how likely the company is to keep up repayments and return the original investment. The highest-rated bonds are regarded as being the most likely to meet their financial obligations, while the lowest-rated have a higher chance of defaulting.
• Principal — This is the amount you have lent to the company that’s issued the bond. It’s also the sum you expect to be returned at the pre-agreed future date.
• Coupon — This refers to the annual interest rate that’s paid on a bond. It can also be known as the coupon rate and is usually expressed as an annual percentage of the principal investment lent. This interest payment will usually be paid once or twice each year. The actual specifics will depend on the bond that’s been purchased.
• Maturity — This is the length of time until the initial investment is due to be repaid to the bondholder. It tells them exactly how long before their money will be returned. At this point the bond expires.
• Yield — The yield refers to the interest received from the bond. It will usually be expressed on an annual basis as a percentage, based on the investment’s cost, current market value, or face value.

Example of how a UK corporate bond works

So, how would holding a corporate bond work in reality?

Let’s take the fictional example of someone buying a bond in ABC business. This company wants to fund an expansion into new markets so has issued bonds to help raise the overall sum required.

Terms of the bond:

• Face value: £1,000 per bond
• Coupon rate: 5%
• Maturity: 5 years

If investor X buys 10 bonds at that price it will cost him £10,000. Each bond will pay him £50 per year in interest. For the 10 bonds that will be £500 per year. If they’re held for the full five years, this means the investor receives a total of £2,500 interest. They will then receive their principal £10,000 investment back when the two years are up.

Corporate Bonds v Government Bonds v Gilts

Don’t confuse corporate bonds with government bonds. The latter are issued by governments to help fund public projects and infrastructure developments. In the UK, these are known as gilts. While they work in a similar way to corporate bonds – you lend money in return for interest payments and your capital returned in the future – the risk and reward will differ.

Corporate bonds are seen as riskier because companies are more likely than a stable government to default on their payments. However, the lower risk being taken means investors in government bonds will receive less money than someone opting for a corporate bond.

Types of corporate bonds in the UK market

There are different types of corporate bonds in the UK. Before committing your money, it’s important to know what’s available – and the type you’re buying.

Investment grade bonds versus high yield bonds

These are bonds that have a low risk of default. They are usually issued by sound, stable companies that are financially viable. They are most suitable for investors who are more concerned about capital preservation and enjoying a steady income. An example would be someone approaching retirement.

High yield UK corporate bonds are at the riskier end of the fixed income scale. These securities offer the prospect of a better interest rate but have more chance of defaulting. Investors opting for high yield bonds will be willing to embrace the enhanced risk because they want to receive higher income. Generally, they will have a longer investment horizon.

Short-term versus long-term bonds

When we’re talking about short and long-term bonds, we’re referring to the length of time before the bond expires. This is otherwise known as the duration. Generally, short-term bonds are those with less than five years left. Long-term, meanwhile, have maturities of more than a decade. You’ll also find medium-term bonds. These will generally have maturities of five to 10 years. All three will meet the needs of different investors.

Short-term bonds

Short-term bonds will minimise the risk posed by inflation/interest rates over time. There’s also less default risk as the company’s revenue visibility will be good. Maturing more quickly also frees up an individual investor’s cash and enables them to pursue other opportunities that may arise.

On the downside, returns are less – due to the lower risk being taken – while the shorter timeframes limit the longer-term growth prospects. Short-term bonds will be favoured by risk-averse investors and those worried that interest rates are likely to rise, as well as anyone approaching retirement.

Long-term bonds

The main benefit of long-term bonds is receiving fixed interest payments over many years. This enables investors to plan – as long as there’s no defaults – over an extended period. There’s also a compounding benefit. Re-investing the interest received over time could help build up an even more substantial nest egg for the future.

On the downside, the longer-term nature means there’s an increased possibility of encountering inflation or interest rate issues. For example, if inflation is far higher than the rate of interest being earned, then the buying power of your money will obviously decline. Finally, having your money tied up in such securities limits your ability to take advantage of changing economic backdrops and fresh opportunities.

Fixed-rate versus floating-rate bonds

Fixed-rate bonds pay a set amount through to maturity. This gives investors visibility as to how much interest they will receive. While the economic backdrop won’t affect the money being received as the rate is fixed, it can have a detrimental effect on how much it’s worth. For example, if inflation has increased dramatically then there’s a chance that the interest being received on the fixed-rate bond will appear poor.

Floating-rate bonds, meanwhile, offer a variable interest rate. This will adjust periodically based on a particular benchmark. The main benefit is that coupon payments will rise as interest rates increase. This will provide some protection to investors against economic changes. Conversely, when interest rates decline, the coupon paid will also take a tumble. The uncertain nature of expected payments can also make it more difficult to plan in advance.

So, which one should you choose?

This all depends on your personal situation. If you need clarity on money received then you need to opt for a fixed rate bond. However, if you believe interest rates are set to rise then a floating rate bond might afford you some much-needed protection.

Benefits and risks of investing in corporate bonds

There are pros and cons when it comes to corporate bonds. Let’s look at each in turn:

Pros

• Usually pay more than either cash or government bonds
• Provide exposure to a wide variety of sectors
• Chance of buying and selling them on the secondary market
• Generally safer than buying into a company’s shares
• Provide a regular income stream

Corporate bonds are attractive for investors wanting to lock in gains ahead of what their cash can earn in banks, but without taking on too much risk. This is particularly suitable for those wanting to diversify their overall portfolios, as well as those with limited investment horizons, for example investors approaching retirement.

Cons

• There are different types so you need to research carefully
• They may be lower risk – but you can still lose your money
• Returns generated are likely to be less than equities
• Decent liquidity means these products can be bought and soldInterest rates and credit ratings can have an effect on bonds

While corporate bonds are known as a less risky security, they’re not totally safe. Even well-established companies can run into financial problems. This means that they can suddenly default. Unlike cash held in a bank, bondholders aren’t protected by the Financial Services Compensation Scheme.

How to invest in corporate bonds in the UK

If you like the idea of fixed income investments, then the next step is: how to buy UK corporate bonds.

Firstly, you can invest directly into corporate bonds. When a company issues bonds, it might be possible to buy them through a broker. They are then traded on the secondary market. You will need to decide the companies or sectors that appeal, in much the same way as you would in choosing equity investments.

This requires research. For example, if you’re buying bonds of a number of companies in the same industry and that area subsequently hits a problem, then your investment could be under threat. You’ll also need to decide on your attitude to risk. You should only consider buying bonds that fit the bill on that basis, as well as your longer-term objectives.

Choosing your UK corporate bond

As we mentioned above, each ratings agency will have its own way of ranking bonds. However, the highest-rated – meaning the most likely to fulfil its obligations – will usually be classed AAA-rated. There’s then a sliding scale to AA, A, etc. Those ranked CCC or below will be regarded as more speculative investments. While the interest rate is higher, so is the risk of losing your money.

It’s also worth seeing if the bond has any specific quirks. For example, a callable bond is one that enables the issuer to redeem the bond before its maturity date. Such securities often pay higher coupon rates to compensate investors for the prospect of them being called back early.

Corporate bond funds

Obviously choosing individual bonds is risky. Even experienced managers can find it hard to scrutinise the inner financial workings of a particular holding. That’s why there’s an alternative in the shape of corporate bond funds. They will pool money from numerous investors and use it to buy a portfolio of corporate bonds.

It will be down to the manager at the helm to pick and choose the best UK corporate bonds for their individual portfolios. They will pay attention to coupon and maturity rates as they construct a fund that can deliver a stable income.

How FundCalibre can help you choose the right corporate bond fund

Corporate bond funds can provide tremendous benefits to investors but it can be very difficult to choose as there are hundreds available. Fortunately, FundCalibre can help. Its Elite Rating system reduces your workload by highlighting the most attractive funds within a wide variety of equity and fixed income sectors.

Our expert team analyses thousands of investment portfolios and trusts – and then whittles them down to a more manageable list of 200. You can rest assured that Elite Ratings are hard to achieve. No more than 10% of funds in any sector reach this standard. Our philosophy is to only highlight the best we can find.

Is now a good time to buy corporate bonds in the UK?

This is a conclusion you’ll need to draw for yourself. However, it’s never a wise idea to try and time the market. Any investment in fixed income should be made as part of your overall financial planning – and if you believe exposure will increase diversification and help you meet objectives.

When evaluating if a corporate bond is right for you, the most important thing to consider is your investment goals (ie income, capital preservation, risk tolerance).

One fund to consider in this space is the Man Sterling Corporate Bond fund which is up 54.53% over 3 years and has been first quartile every time period since launch*. Manager Jonathan Golan is one of the most exciting young bond fund managers around today. This is a genuinely active fund, differentiated by the manager’s focus on smaller bond issuers and the team’s ability to find undervalued credits which have been overlooked by peers.

FAQs about Corporate Bond funds

1. How do I buy corporate bonds in the UK?
   You can buy bonds directly from brokers, as well as via investment funds whose managers pool together investors’ money and buy a variety of such securities.
2. What’s the best way to invest in corporate bonds in the UK?
   Buying a corporate bond fund can be a good way to get access to the asset class in a diversified way as the portfolio will be run by a professional manager. They will make the necessary buying and selling calls.
3. How does taxation of corporate bonds work?
   Bonds issued by the UK government (gilts) are exempt from capital gains tax, as are bonds bought directly from the issuer – and issued in pounds – as these are classed as qualifying UK corporate bonds. Other types of bonds are subject to CGT unless they’re held inside an Individual Savings Account (ISA).
4. Are corporate bonds safer than stocks?
   Yes, they can be, although this depends on the bonds and the stocks. Bonds are regarded as being safer because they provide a fixed income stream. However, a company can still default on its repayments.
5. When is the right time to invest in corporate bonds?
   You will need to decide whether now is the right time to invest in bonds based on your personal circumstances, financial objectives, and the economic backdrop.

Conclusion: Are corporate bonds right for you?

Most investors can benefit from having at least some exposure to corporate bond funds in their overall portfolios. The big question is how much? The answer to this question will depend on a combination of your personal circumstances, stage of life, financial objectives, and attitude to risk. If you want to earn returns above what the bank will offer – but want to tone down the volatility of the stock market – then they obviously make sense. However, you need to do your research to ensure the bond fund you’ve chosen has the right credit quality exposure to meet your needs.

*Source: FE Analytics, total returns in pounds sterling, at 21 July 2025