Corporate bonds are debt securities issued by companies to raise capital. Like government bonds, they pay fixed interest and return principal at maturity — but they carry higher risk than government bonds, reflected in higher yields (the credit spread).
How Corporate Bonds Work
When a company issues a bond:
- You lend the company a fixed amount (face value)
- The company pays you regular interest (coupon) — typically semi-annually or quarterly
- At maturity, the company repays the face value
Credit risk: Unlike government bonds, a company can default — failing to make coupon payments or return principal. The higher the perceived default risk, the higher the yield offered to attract investors.
Credit ratings: Bond rating agencies (S&P, Moody’s, Fitch) rate bonds from AAA (highest quality, lowest risk) down through BBB- (investment grade) to BB and below (sub-investment grade or “high yield”).
Corporate Bond Yields vs Government Bonds
Corporate bonds offer a credit spread above government bond yields — additional yield to compensate for default risk:
| Bond type | Approximate yield above AGBs |
|---|---|
| AAA-rated (top corporates) | +0.10–0.30% |
| AA-rated (large banks, major corporates) | +0.30–0.80% |
| A-rated | +0.60–1.50% |
| BBB-rated | +1.00–2.50% |
| BB and below (high yield) | +2.50–8%+ |
In practice, most retail bond ETFs (VAF) hold investment-grade bonds (BBB- and above), limiting credit risk while still earning a spread over government bonds.
ASX-Listed Retail Corporate Bonds
Some Australian companies list retail bonds directly on the ASX, making them accessible to individual investors:
Examples of companies that have issued ASX-listed retail bonds:
- Major banks (CommBank, ANZ, Westpac, NAB) — subordinated notes, hybrid securities
- Woolworths — retail notes
- Transurban — infrastructure bonds
- Origin Energy — retail bonds
ASX-listed retail bonds trade in $100 units, making them accessible with low minimum investment.
Key caution on bank subordinated notes and hybrids: Many ASX-listed “bonds” from Australian banks are actually hybrid securities — they include equity-like features (e.g., they can be converted to shares or written off in a crisis). These are materially riskier than standard bonds. Read the prospectus carefully before investing. See Hybrid Securities Australia.
Corporate Bond ETFs in Australia
For most investors, corporate bond exposure via ETFs is simpler and more diversified:
| ETF | Focus | MER |
|---|---|---|
| VAF | Australian government + investment-grade corporates (~30% corporate) | 0.20% |
| HBND | Australian investment-grade corporate bonds | 0.32% |
| IAF | Australian composite bonds (government + corporate) | 0.15% |
These ETFs provide exposure to dozens or hundreds of corporate bonds, eliminating the company-specific default risk of owning a single corporate bond.
Key Risks in Corporate Bond Investing
Credit risk (default risk)
The company may fail to pay coupons or return principal. Higher-yield bonds carry higher default probability. Diversification via ETFs reduces but does not eliminate this risk.
Interest rate risk
Like all bonds, corporate bond prices fall when interest rates rise. Longer duration = greater interest rate sensitivity.
Liquidity risk
Individual corporate bonds, especially from smaller issuers, may be thinly traded — it can be difficult to sell at a fair price before maturity. Bond ETFs avoid this issue (the ETF itself is liquid even if underlying bonds are not).
Call risk
Some corporate bonds are “callable” — the issuer can repay them early (usually when rates fall and refinancing is cheaper), cutting your return short.
Related Articles
- Australian Government Bonds Explained
- Bond ETFs vs Direct Bonds Australia
- VAF vs VGB Australia
- Hybrid Securities Australia
- Bonds hub
Frequently Asked Questions
Are corporate bonds available to retail investors in Australia? Yes — via two routes: ASX-listed retail bonds (buy through a brokerage account like shares) and bond ETFs (VAF, HBND, IAF). Bond ETFs are simpler and more diversified for most investors. Individual ASX-listed bonds allow selection of specific issuers and maturity dates.
Are corporate bonds safer than shares in Australia? In general, yes — bondholders rank ahead of shareholders in a company’s capital structure. If a company fails, bondholders are repaid before shareholders. However, corporate bonds still carry credit risk (potential default) and interest rate risk. Investment-grade corporate bond ETFs carry substantially lower risk than individual shares, though also lower long-term return potential.
What is the difference between a corporate bond and a hybrid in Australia? A corporate bond is a pure debt instrument — fixed coupon, fixed maturity, no equity features. A hybrid security (common in Australian banking, often called “capital notes” or “subordinated notes”) contains equity-like features — it can be converted to shares, written off, or have coupons deferred under certain conditions. Hybrids carry significantly more risk than standard corporate bonds.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.