The strategy Invest in corporate bonds.

Do I want to do that? If you're a bit cautious about the sharemarket after the GFC, odds are you'd like to consider a more conservative investment. Even if you're still keen on shares, assets such as bonds should still be considered as part of a diversified portfolio. But, as the GFC proved, not all apparently "safe" investments are the same, so it pays to understand what you're getting into.

So what is a corporate bond anyway? In very simple terms, they are securities through which companies borrow money from investors. Instead of dealing with lenders individually, companies issue bonds promising investors the return of their money at a set date in the future and interest on their money in the meantime. So, in essence, bonds are just an interest-bearing investment like a term deposit.

But there are some key differences. Because bonds are issued by companies, they are not guaranteed by the government in the same way that term deposits or indeed government bonds are. You are a creditor to the company issuing the bond, so the safety of your investment depends on the ability of that company to repay its debts.

The bond may or may not be secured against property owned by the company. If it is secured, that makes it somewhat safer (depending on the quality of the security) but the bond may just be guaranteed by the company generally. Some bonds are known as senior debt, which means that if the company is wound up, you'll be ranked behind secured creditors but ahead of other unsecured creditors. If the bonds are subordinated debt, you'll rank ahead of shareholders but will have no priority over other unsecured creditors. So you need to understand what security is being offered, if any, and where you will rank if the company goes belly-up.

How do I find out all that? You'll need to look at the prospectus. If you're considering investing in bonds, the Australian Securities and Investments Commission has released a guide on what you need to know - it's at http://www.fido.gov.au. Companies must lodge a prospectus with ASIC before they offer bonds, though you can also buy them on the Australian Securities Exchange, just as you can buy shares. ASIC says if you're buying on the secondary market, the prospectus may be out of date, so you should also check for information on the bonds on the company's website and the information it provides to the ASX.

It says the prospectus should also contain key information such as the interest rate, whether that rate is fixed or floating and the interest payment frequency - along with any extra terms and conditions.

What do you mean by fixed or floating?

A fixed rate is set at the outset and calculated as a percentage of the face value of the bond. A simple example might be a $1000 bond with a 5 per cent interest (or coupon) rate. Floating rates are more like variable rates. They are often set at a specific premium to a commonly used interest rate. An example might be 3 per cent above the 90-day bank bill rate. If you're looking at a floating rate, the prospectus should tell you when and how frequently the rate will be recalculated.

ASIC says the fixed rates have an edge if you're depending on the interest for your income. With floating rates your interest payments will change - sometimes they'll be higher than you originally anticipated but they could also be lower.

Is it better to buy bonds through the ASX? You'll incur extra costs such as brokerage but otherwise it depends on the value of the bond. When you buy bonds through a prospectus, you buy them for their face value and will eventually (all going as planned) receive that face value back. Once bonds are listed on the exchange, their market value fluctuates even though their face value is unchanged. So you'll still receive the original purchase price back if you hold the bond to maturity but you may have to pay more (or less) to buy it.

Why does the value change? Bond prices can be affected by interest rate movements (generally, interest rate rises reduce the value of fixed-rate bonds and lower interest rates increase their value), changes in the company's credit rating and good old supply and demand. If you want to sell your bond early, this could result in a profit or loss on your investment but if you hold the bond to maturity this is less of an issue.