What are corporate bonds and how do you buy them in the UK?

What is a corporate bond?

A corporate bond is a debt instrument issued by a company to raise capital from investors. When you buy a corporate bond, you are effectively lending money to the issuing company in exchange for:

• A fixed coupon — a regular interest payment, typically paid semi-annually or annually, expressed as a percentage of the bond's face value
• Repayment of the principal — the original face value of the bond — at a set maturity date

For example, a £1,000 corporate bond with a 5% annual coupon would pay £50 per year in interest and return the £1,000 principal at maturity. The issuer commits to these payments regardless of whether its share price rises or falls — which is why bonds are considered lower risk than equities for most companies.

Corporate bonds are typically issued in large denominations — often £1,000 to £50,000 minimum — which can make direct bond purchases less accessible to retail investors than equities. Bond ETFs provide a more accessible route for most investors.

How do corporate bond yields work?

The yield on a corporate bond is the annual income expressed as a percentage of the current market price. Because bond prices move in the secondary market after issuance, the yield changes even though the coupon stays fixed.

This creates the most important relationship in fixed income: bond prices and yields move in opposite directions. When demand for a bond rises and its price increases, the yield falls. When prices fall, yields rise.

The yield to maturity (YTM) is the most comprehensive measure — it reflects the total annual return an investor would receive if they bought the bond at the current price, received all coupon payments, and held it to maturity.

Investment grade vs high yield bonds

Corporate bonds are rated by credit rating agencies — primarily Moody's, S&P, and Fitch — based on the issuer's ability to service its debt. These ratings divide the bond market into two broad categories:

Investment grade bonds are issued by companies rated BBB- or above (S&P/Fitch) or Baa3 or above (Moody's). These issuers are considered financially stable and unlikely to default. Investment grade bonds pay lower yields in exchange for their relative safety. Examples of UK investment grade bond issuers include HSBC, Vodafone, and National Grid.

High yield bonds — also called junk bonds — are issued by companies rated below investment grade. These companies carry a higher risk of default, and investors demand higher yields to compensate. High yield bonds can generate significantly higher income than investment grade, but with commensurately greater risk of loss if the issuer runs into financial difficulty.

For most retail investors, investment grade bonds or broadly diversified bond ETFs are the most appropriate starting point.

What affects corporate bond prices?

Several factors drive corporate bond prices up and down after issuance:

• Interest rates are the single most important driver. When central bank rates rise, newly issued bonds offer higher coupons, making existing lower-coupon bonds less attractive — their prices fall and yields rise to compensate. Long-dated bonds are most sensitive to rate changes: a 1% rate rise can cause a 10-20% price drop in long-maturity bonds.
• Credit quality of the issuer affects pricing. If a company's financial position deteriorates, investors demand higher yields to hold its bonds. Upgrades or downgrades from rating agencies can cause sharp price movements.
• Credit spreads are the extra yield a corporate bond pays over an equivalent government bond. Spreads widen in times of economic stress and tighten when confidence is high. As of June 2026, investment grade credit spreads remain relatively tight by historical standards.
• Inflation erodes the real value of fixed coupon payments. Higher inflation expectations tend to push bond yields up and prices down.
• Liquidity affects pricing particularly for smaller or less well-known issuers. Less liquid bonds can be harder to sell at a fair price, especially in stressed markets.

Corporate bonds vs government bonds (gilts)

Government bonds (gilts in the UK) are debt issued by the UK government and are considered the lowest-risk fixed income instrument available to UK investors. Corporate bonds pay a higher yield than gilts to compensate investors for taking on the additional credit risk of a private company borrower.

As of June 2026, the UK 10-year gilt yields approximately 4.79% — meaning quality corporate bonds typically yield 5-7% or more depending on the issuer and maturity.