It’s easy to become confused about bonds – the term covers a wide range of financial products, many of which are very different from each other. In this video, Ed Bowsher offers a simple explanation of the main types of bond.
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If you’ve ever thought about investing or saving any spare cash you may have, you’ve probably come across the word ‘bonds’. This word is used to describe a range of very different financial products.
The different types of bonds are:
Fixed rate bonds or cash bonds
These are basically savings accounts. You tie your money up for a set period of time, with which you get a guaranteed set interest rate. The bonuses are they are safe and you can plan ahead. The downsides: interest rates are low, so if interest rates in the wider economy start to rise, your fixed rate bond will stay low.
UK government bonds or guilts
This is essentially when you lend money to the government and get an IOU in return. The government are always launching new guilts. It’s a long term investment with a low interest rate. You can sell your guilt early on the financial market, but you won’t necessarily get your original investment back, because guilts are traded on the stock market, so their value could rise or fall in the meantime. At the moment the current price of guilts are very high, so now is not a good time to invest in guilts.
Corporate bonds are similar to guilts, but issued by individual companies. They are traded on the markets and their value goes up and down from day to day. Corporate bonds pay a higher return than guilts because they’re seen as a higher risk. Some companies are riskier to invest in, so you get a higher return.
It has become much easier to invest in corporate bonds because of the ORB, run by London stock exchange. More info available at: http://www.londonstockexchange.com/
Profits bond or investment bond
These were very popular in the 1960s/70s, but are now largely discredited. The charges are very high with a disappointing performance. Steer clear.
These are a new innovation, similar to corporate bonds, but are typically issued by smaller, newer companies. You’re tied in for a term of three years and won’t be able to sell your bond at all until the bond matures in three years’ time. Lot of mini bonds have paid high return rates, so some private investors have invested in mini bonds because they want the higher rate. However, they’ve often not appreciated how risky some of these mini bonds can be. Small companies are more likely to go bust, if they do you won’t get your money back.