Corporate Bonds - key risks and features

MiFID II

Investing in corporate bond markets provides an investor with an exposure to an issuer company and may provide a return through the fixed coupon paid by the issuer, or through an increase in the bond price. Bonds are a high risk investment where the investor takes direct credit risk exposure against the issuer. 

The value of bonds may fluctuate and income is not guaranteed. Your investment may not increase in value, and you may lose some or all of your investment.

Key risks and features

  • Market Risk

    • Income from your investment is not guaranteed, if the issuer defaults you may receive no interest payments, or a delay to interest payments
      • If the issuer experiences financial difficulty you may lose up to 100% of your investment
        • Market risk in bond markets can materialise due to macroeconomic or issuer specific factors, and may impact a single issuer, issuers within an industry, or the market as a whole
          • The value of the bond or the interest payments they distribute are determined by the financial performance of the issuer, but can also be influenced by the performance of similar companies in the same sector,  social or governmental issues in the home country of the corporation.

        • Volatility Risk

          • You will be exposed to volatility risk if you choose to trade a bond on the secondary market
            • A change in the issuers financial performance can have an impact on the value of the bond.
              • Different bonds are subject to different volatility risks. This may depend on the credit rating of the issuer, the size of the issue, the liquidity in the market and other factors.

            • Liquidity Risk

              • If you wish to sell the bond on the secondary market, prevailing market conditions may reduce the demand of the product, this could impair the market price and the bond may be described as illiquid
                • Certain bonds may be illiquid which can lead to a big difference between the buying price and selling price, and it may be difficult to dispose of certain bonds 
                • This may be especially the case for smaller issues.

              • Credit Risk

                • A reduction in creditworthiness may affect the issuers ability to meet fixed income payments
                  • In the event of insolvency of the issuer, you may lose 100% of your investment.

                • FX Risk

                  • Bonds may trade in a currency other than the currency which is most relevant to the investor, there is an increased risk that the movement in exchange rates will affect the returns  the investor receives from investment in the bond.

                • Conflicts Risk

                  • There are no product specific conflicts of interest risks relating to bonds
                    • Conflicts arising from Investec’s business model are managed through internal controls and processes and is detailed in the Conflicts of Interest Policy.

                  • Conflicts Risk

                    • Investec may take and /or hold positions that conflict with those of our clients, more details around the treatment and execution of client orders can be found in the Order Execution policy which can be found on the website
                    • Conflicts arising from Investec’s business model are managed through internal controls and processes and is detailed in the Conflicts of Interest Policy.

                  • Transparency

                    • Bond markets are generally very transparent with primary issuance of the instrument  having to comply with stringent prospectus rules.

                  • Margin Risk

                    • Margin Risk is not applicable to bonds.

                  • Contingent Liabilities

                    • Contingent Liabilities are not applicable to bonds.

                  • Exit Costs

                    • Early exit fees are not applicable to bonds.

                  • Leverage

                    • Leverage is not applicable to bonds.

                  • Interest Rate Risk

                    • Interest Rate risk may impact on bond prices in the secondary market and may also impact the credit standing of the issuer.

                  • Additional risks associated with this instrument

                    • Bonds may be traded ‘over the counter’ (OTC) and not on an exchange, therefore trading transparency is much less than when compared to the equity markets.

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