WHAT ARE BONDS?
Information on investing in bonds

What are bonds?

Bonds are usually considered low risk investments. They do not show the volatility of stocks and shares bought on the stock market as most have a fixed interest rate. Bond funds are managed by investment professionals. Since the is large pool of investor money, the investments that make up the fund can be widely diversified which means the risk is minimised.

Minimum investmet for bonds

Unlike stocks and shares, bonds are traditionally have a minimum investment limit. For example, bonds are typically require a minimum investment of £1000 over a fixed period of time – typically one year.

How do I make money with bonds?

Bonds pay an income, (yield or interest), which is fixed on the date they are issued. The value of the gilt or corporate bond can rise and fall. If you invest in bonds, the only thing that is guaranteed is that you will receive the initial issue price back if you keep it until it matures.

Advantages of investing in bonds

1. Someone else makes the investment decisions for you. The pool is managed by professionals. The downside of this it that you have to pay a fee for this service.
2. Bonds are very safe (usually). Unlike the stocks and shares, bonds are very low-risk investment. The downside of this is that you get a very low return on your investment.

What happens when a bond matures?

Bonds and shares are both securities. With shares, the share holder own part of the issuing company (known as an equity stake). Bond holders basically ‘lend’ money to the issuer and in return are paid interest. Bonds usually have a defined term, or maturity. At the maturity date, the bond is redeemed.  The exception to this is a consol bond, which is a type of bond that has no maturity date.

Types of bonds

Bonds have different safety ratings (or levels of risk) depending on how safe the individual company is. Generally, the poorer the safelty rating of company issuing bonds, the higher the level of riks you are taking. Generally, the higher level of risk, the higher the interst rate you will receive.

Who should invest in bonds?

Bonds are an excellent investment for people who have a lump sum that they want to invest, and do not mind not being able to access their money for a fixed period of time. The rate of interest for a bond  is usually higher than a savings account. They are generally low risk investments and should appeal to people who have a conservative investing style.

 

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