Guide to Bonds

The value of investments, and the income from them, can fall as well as rise and you may not get back the full amount you invest.

What are Bonds and what are some of the risks and rewards.



A bond is loan to an institute, government or company. With this form of investment the issuer i.e. the company borrows the money from the lender (you). This loan enables the company to invest the money into the business. The amount you invested will be repaid at the end of a pre-agreed fixed term.

  • Bonds have a nominal value - usually this value is 100. The nominal value is the value that will be returned to you when the bond matures.
  • Bonds are traded on the bond market.

How are bonds different from shares?

  • Bonds can be less volatile than shares and ordinarily pay a steady stream of income.
  • Interest is paid to the lender (you) in addition to your initial investment being repaid to you.

Who issues bonds?

  • The main issuers of bonds are governments, companies and large institutions such as the European Investment Bank and the World Bank.

There are many types of Bonds. Some of these are detailed below:

  • Government bonds: these bonds are issued by governments.
  • Corporate bonds: these bonds are issued by a corporation.
  • Bond funds: invest in several bonds and therefore there is not one single point of maturity.

You can buy bonds through a stockbroker.

You can buy Government bonds from the Post Office.

You can also buy bonds as part of a collective investment.

When buying bonds you will incur charges - review these charges before purchase.

Bonds can be less volatile than shares. The main risk with bonds is if the company is unable to pay back the interest and/or even the money you lent. This could happen as a result of the company being in debt.

Government bonds are seen as being the 'safer' option - although some governments have previously been unable to repay the loans. As a result of lower risk the return on Government Bonds is generally lower.

If investing in bonds for a particular company research the company first and determine the credit rating for the company. A company with a higher credit rating is seen as being less risky than those with lower credit ratings.

Bonds that are 'less risky' tend have a lower return.

If you have invested in a single corporate bond and paid more than the nominal value then you will have made a loss when the investment matures.

  • The opportunity to earn a higher rate of interest than is available from a bank/building society deposit account.
  • The safe return of your initial investment at maturity (the end of the bond's life).
  • You should receive a steady stream of income from your bond as the interest rate is normally fixed and will never change.

The lower a bond's credit rating, the higher the risk and the more return you can expect. Standard & Poor's and Moody's are two credit rating agencies that analyse the credit worthiness of a security. Ratings are reviewed regularly and can be changed.

Typically, the greater the risk the higher the interest rate/income yield to attract investors. However, is your capital safe? Will the company still be in business to pay you back your capital?

When interest rates rise, bond prices fall, and when interest rates fall, bond prices rise. Bonds are often called 'fixed-interest securities'. This is because the borrower usually pays a fixed amount of interest. But the price of bonds moves as the economy changes. To find out how much you'll make from the bond, or the bond's 'income yield', divide the fixed interest rate by the price you paid for it. If you buy a bond above its issue price, you'll suffer a capital loss if the bond is held until redemption. But if you buy a bond below its issue price, you'll make a gain.

Put simply, a bond is like an I.O.U. or a loan……but you do the lending and a company or the government does the borrowing.

In return for the loan, the borrower agrees to pay a fixed rate of interest……throughout the term and, at maturity, pay back the loan in full.

Company bonds are called Corporate bonds and UK Government bonds are called gilt-edged securities, or gilts.

Corporate bonds offer higher interest payments than gilts but they are considered to be riskier.

Bonds are primarily an income generating investment. They usually offer a competitive and predictable income and the reassurance of knowing that if the bond is held to maturity, the nominal value should be repaid.

The biggest risk to an investor is the company or government defaulting. This is when they cannot pay the interest, or even the original value of the bond at maturity.

The independent credit rating for a Bond, offers a guide to a company’s financial strength and the risk of that company defaulting.

And remember, a higher interest payment may mean a higher risk.

Find out more about Bonds, in the Learning & Research section of natweststockbrokers.com


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