Income and Growth Survey: The Name Is Bond

STOCKMARKET VOLATILITY, such as we have seen in recent months, makes investors wary. Rather than punt their cash directly into equities, they are seeking alternatives that will provide higher returns than from a building society account, but without too much risk.

Bonds can be part of a low-risk investment strategy. In essence, they are "loans" of capital by the investor to a private company, the Government, or some other official body. Bond owners will receive regular interest on their savings, plus the repayment of the original investment.

Unlike a typical building society account, the rate of interest of a bond is fixed at the outset, guaranteeing a certain level of income.

Most bonds will have a fixed life, particularly Government bonds, or "gilts". At the end of that life - which could be just a few years or up to 30 years away - the original capital will be repaid by the company or official body which had borrowed it. A few gilts, known as "irredeemables" are undated.

Gilts with less than five years left to run are called "shorts", those with five to 15 years left are called "mediums", those with more than 15 years are known as "longs". While you cannot cash in a bond for its redeemable value before the repayment date, it can still be sold on the stockmarket. It becomes a "tradeable security".

Interest paid on gilts is known as a "coupon". It is fixed for the life of a gilt. The coupon, usually paid twice a year, depends on whatever rates of interest are in place at any moment, plus the borrower's financial strength. For example, gilt rates are lower than those paid by private companies on their bonds. This is because most people assume the Government is less likely to default on the loan.

While a gilt can have face value, this may not necessarily be the price that you pay for it. Bond prices can go up or down, depending on a range of factors. One of those is the level of interest rates. When interest rates rise, the price of a bond falls and vice versa.

This is because a bond paying a coupon/yield of, say, 5 per cent will become less attractive if interest rates rise to 6 per cent. Alternatively, should interest rates fall to 4 per cent, a bond paying more than that becomes more sought-after. The lesson to be learnt here is that the current yield, based on the price paid for a bond, is more important as an indicator of income than the coupon.

Equally important, assuming that you keep a bond until maturity, is its redemption yield. This is the term used for the earnings received from the interest paid to you, plus losses or gains on the capital invested when the bond is redeemed.

There are many different types of bonds:

n Gilts are bonds issued by the Government. They are considered among the safest form of investment.

n Index-linked gilts, which are also issued by the Government, differ from conventional gilts because payments they make are linked to inflation.

n Corporate bonds are issued by private companies which offer a certain rate of interest to investors. A company's bonds are assessed by credit rating agencies.

n High yield corporate bonds, otherwise known as "junk bonds", are an extension of corporate bonds. They pay a higher yield because their credit rating is lower.

n Preference shares have no redemption date. They pay a fixed dividend. They are perceived as being higher-risk than ordinary corporate bonds.

n Convertibles provide the option of converting into the ordinary shares of a company. They too pay a fixed rate of interest per share - up to the moment of conversion.

n Floating rate notes (FRNs) are securities typically issued by banks. They offer a rate of interest fixed for three months. The rate is higher than from cash deposits.

n Treasury Bills are short-term securities issued by the Government. They usually have a maturity date of just three months.

n Certificates of deposit are issued by both banks and businesses. They are deposits that can be bought and sold in the stockmarket.

n Zero-coupon bonds do not pay interest, but are issued at a large discount to their face value, so a return comes in the form of capital gains.

n Permanent interest bearing shares (PIBS) are issued by building societies, and are effectively shares in that society. They have no redemption date.

Nic Cicutti

Sport
premier leagueLive: All the latest news and scores from today's matches
News
politics
News
newsMcKamey Manor says 'there is no escape until the tour is completed'
News
The clocks go forward an hour at 1am on Sunday 30 March
news
PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Sport
Luis Suarez and Lionel Messi during Barcelona training in August
footballPete Jenson co-ghost wrote Suarez’s autobiography and reveals how desperate he's been to return
Money
Welcome to tinsel town: retailers such as Selfridges will be Santa's little helpers this Christmas, working hard to persuade shoppers to stock up on gifts
news
Arts and Entertainment
Soul singer Sam Smith cleared up at the Mobo awards this week
newsSam Smith’s Mobo triumph is just the latest example of a trend
News
Laurence Easeman and Russell Brand
people
Sport
Fans of Dulwich Hamlet FC at their ground Champion Hill
footballFans are rejecting the £2,000 season tickets, officious stewarding, and airline-stadium sponsorship
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.

iJobs Job Widget
iJobs Money & Business

Compensation and Benefits Manager - Brentwood - Circa £60,000

£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

Data Analyst/Planning and Performance – Surrey – Up to £35k

£30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Markit EDM (CADIS) Developer

£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

Day In a Page

Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
DIY is not fun and we've finally realised this as a nation

Homebase closures: 'DIY is not fun'

Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

Pumpkin spice is the flavour of the month

The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

Paul Scholes column

I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

While other sports are stalked by corruption, we are an easy target for the critics
Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker