Investment insider: Low interest rates should not mean lower standards

 

Strange things can happen in a low-interest-rate economy. For instance, the interest that we earn on our savings has dropped to such pitiful levels that our nest eggs are losing money in real terms.

Investors looking for alternatives to cash savings are therefore forced to choose from three of the other four main asset classes – namely shares, property and bonds. Risk-averse investors are unlikely to warm to shares even though the stock market has historically delivered inflation-beating returns, and property means spinning the roulette wheel of bank lending criteria.

Bonds are IOUs: bondholders are in effect lending money to a company or a country at a suitable rate of interest that compensates them for the risk.

The glut of cheap government bonds issued through the quantitative easing programme has pushed bond yields down to unattractive levels. This has enabled businesses to also offer lower yielding bonds, even if the interest rates may not properly reflect the riskiness of the loan.

But in a low-interest-rate economy almost anything goes, as investors are presented with a choice of taking it or leaving it. Often they will take it.

One of the first companies to sell bonds direct to its own customers was the shaving supplier King of Shaves. About three years ago, the company offered £1,000 "shaving bonds" to shaving enthusiasts. The yield was 6 per cent, which might not fully reflect the risk of buying unlisted bonds in a relatively unknown company.

The upmarket confectioner Hotel Chocolat also went down the direct-to-customer route, but with a twist. It raised more than £3m by offering bonds to chocolate lovers. But instead of cash, interest of up to 7.29 per cent was paid in deliveries of chocolates every two months. More recently, John Lewis gave staff and customers the chance to earn up to a 6.5 per cent by lending the company money. The bonds paid 4.5 per cent, topped up with 2 per cent in John Lewis vouchers.

The attraction of bonds is easy to see, but bear in mind a few things. First, the yield should properly reflect the lender's risk rather than what the company thinks it can get away with. Second, remember with fixed-rate bonds that inflation may rise faster than expected. Finally, just because we are in a low-interest-rate environment, we shouldn't lower our standards.

David Kuo is director of fool.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Marketing Services Manager - (communications, testing, DM)

    £32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

    Guru Careers: Finance Account Manager

    £Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

    Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

    £40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

    Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

    £45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

    Day In a Page

    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas
    La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

    Deaf community outraged by La Famille Bélier

    The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
    10 best high-end laptops

    10 best high-end laptops

    From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
    Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

    Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

    The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
    Susie Wolff: A driving force in battle for equality behind the wheel

    Susie Wolff: A driving force in battle for equality behind the wheel

    The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
    Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

    'No abs Adam' plans to muscle in on Usain Bolt's turf

    After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
    Calls for a military mental health 'quality mark'

    Homeless Veterans campaign

    Expert calls for military mental health 'quality mark'
    Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

    Meet Racton Man

    Analysis shows famous skeleton was a 6ft Bronze Age superman
    Garden Bridge: St Paul’s adds to £175m project’s troubled waters

    Garden Bridge

    St Paul’s adds to £175m project’s troubled waters
    Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

    Stuff your own Christmas mouse ornament

    An evening class in taxidermy with a festive feel
    Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

    Joint Enterprise

    The legal doctrine which critics say has caused hundreds of miscarriages of justice
    Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

    Freud and Eros

    Love, Lust and Longing at the Freud Museum