Bond basics

In his latest video tutorial, MoneyWeek’s deputy editor Tim Bennett explains the basics of bonds – what they are and how they work.


A bond is a type of IOU issued by a government, local authority or company to raise money. If, for example, a company wants to borrow money for ten years at a time when investors expect a 5% yield, it must offer a £5-a-year interest for every £100 until the bond matures (this payment is known as the coupon). However, expected yields are constantly changing. If interest rates rise to 10%, a new investor won’t be willing to pay £100 for an annual return of £5 when he can get £10 elsewhere.

He will expect a minimum 10% on his initial outlay, so the price of the bond will have to fall to £50 to reflect that. So, at a time when interest rates are going up, bond investors are seeing the value of their asset drop. On the other hand, if interest rates fall, a bond’s price will rise.

• Entry from MoneyWeek’s Financial glossary.

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  • Jim

    Very interesting.

    Just wondering, if the bond is £100 but the market price is £113, would that mean if I wanted to buy this bond I would have to pay the market price of £113.

    Or could I buy the bond at £100 and sell it at £113 to the market.

  • Jim again

    Just wondered if you might be considering putting these into book form. Would be useful as a portable reference source.

  • Bridget

    thanks Tim-enjoyed that
    what happens when the government does go broke?

  • Peter

    Is it too naive to think that QE2 releases bond proceeds that will simply be retained by the banks to build up their deposits to keep the regulators happy and to pay their bonuses. Do the bond dealers get bonuses on their bond sales to the Treasury. If so, where does that money come from?
    I saw that Moneyweek was very well represented on the excellent Channel 4 programme about the national debt (£4.8 trillion) this week. I wasn’t clear about the creditors to whom all this money is owed. Can you help Tim? Excellent video as ever.

  • Shailesh Lalitbhai Budhdeo

    Tim, Well done for the vivid insight into into Treasury Gilts and Corporate Bonds, quite a eye-opener! It would be a good idea to do similar presentations with lot of other technicalities that exists in the financial markets so that it may all make sense to all of us . Many thanks.

  • Henery

    Very good and clear. I’ve enjoyed all the videos I’ve seen so far.

  • Teresa

    Yes, Tim, but most income seekers (at least until v. recently) have been forced into buying corporate, but also high yield and strategic bond funds, which are still paying relatively high income and which aren’t taxable within an ISA. You don’t mention these commercial bond funds & how to judge the risks (as compared to equity income funds, say) – leaving it to the skills of the fund manager. Are the best ones still risky?

  • Tim

    Teresa – good suggestion for a future bonds video

  • Tim

    Jim – you pay 113 for it

  • Parminder Pannum

    Excellent video- clear and concise. Assuming inflation rises and government increase interest rates am i correct in assuming that the market price of the bond will change

  • Tim

    Parminder – yes that’s right. If interest rates rise (as inflation expectations pick up) the price of a fixed income bond will fall. This is covered in the next video out shortly so keep watching this space!

  • Andy

    Just wanted to to say how much I enjoy the video presentations.
    For me the maths and formulas are as important as the fundamentals. Very few articles ever show the calculations being performed, they usually just describe them.
    Theorist learner I suppose… I like to see how the nuts and bolts fit together!

  • Demi God

    Tim, love the videos – now please apply a low cut filter from 100Hz down to get ride of that traffic noise in the back ground! Audio engineer

  • charlie

    have I missed something here…your tutorials are fine but they are extremely basic. The concepts discussed in your e-mails assume WAY more knowledge than your tutorials and I am slightly concerned people would be investing in markets without the basics completely embedded

  • Tim

    Charlie – these videos are designed to introduce key concepts for investing and strip away some of the mystique surrounding financial jargon. However, to answer your point – yes, a more advanced series may well follow.

  • peter

    At some stage could you or one of your team at MW please explain how the UK can afford to pay £6 billion to Ireland when our National Debt is £4.8 trillion. Would we have to borrow the money to give/lend to Ireland and our taxpayers have to pay the interest on the loan and if so, who would lend it to us? It sometimes seems that we are living in a virtual economy where reality is the game. Thanks

  • Steve

    Hi Tim
    Very good and clear. I’ve enjoyed the video and it was very helpful.

  • Johan


    Amazing video as always. Going for an interview at an investment bank here in Tokyo and your information is a great way to get concise and poignant information about finance.

    Great work,

  • John

    Great video Tim. Just illustrates how ignorant some people must be when the BBC et all start talking about bonds. Politicians would do well to look at this and others. Most are totally ignorant of the knock on effects of their policies.