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Tuesday, 16 October 2012

Corporate bonds and government bonds

Bonds are loans to companies, local authorities or the government. They usually pay a fixed rate of interest each year and aim to pay back the capital at the end of a stated period. Corporate and government bonds are traded on the stockmarket, so their value can rise and fall.

Types of bond investment

Bonds investments can include:

  • corporate bonds - issued by companies
  • gilts - bonds issued by the UK government
  • bond funds - pooled investments investing in a range of bonds

Corporate bonds

Corporate bonds are issued by companies as a way of raising money to invest in their business. They have nominal value (usually £100), which is the amount that will be returned to the investor on a stated future date (the redemption date). They also pay a stated interest rate each year - usually fixed.  Corporate bonds are bought and sold on the stock market and their price can go up or down.

Gilts (government bonds)

Gilts (or gilt-edged stocks) are bonds issued by the government which pay a fixed rate of interest twice a year. They are considered safe investments as the government is unlikely to go bust or to default on the interest payments.

However, you are not guaranteed to get all your capital back under all circumstances. Gilts, like corporate bonds, are bought and sold on the stock market where their price can go up or down.

Gilts can be bought and sold through brokers, high street banks or through the government's Debt Management Office (DMO) which produces a guide to buying gilts.

Bond funds

Bond funds invest in several bonds (including corporate and government bonds) with different interest rates and different maturity dates. This reduces the risk to your capital. But because of the mix of investments, bond funds can't promise a fixed return; instead they aim for a 'target return'.

For more information about bonds visit the Money Advice Service website.

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