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• Bonds
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Bonds

Bonds – what are they?

Bonds are similar to Gilts in that they represent a loan from you to the issuer. They are priced in £100 nominal units but often have a minimum investment amount, typically £1,000.

The biggest difference between a Bond and a Gilt is risk. While the Government is unlikely to default on a loan (a Gilt), the same can't be said of companies (a Bond).

Companies often issue Bonds as a way of financing expansion, rather than issuing further shares. This would generally be the case if the coupon on the Bond meant it was a cheaper way of raising money.

Bonds – assessing the risks

With Bonds you need to assess the risk associated with the particular issue, rather than the company itself, by looking at the issuer's ability to service its debts, ie to make the payment of interest when due and to repay your capital at the maturity date.

Bonds have higher priority than equity in any winding up, so for Bond payments to be in jeopardy there would be a serious problem for the company as a whole and, therefore, for its equity shareholders too.

Rating Bonds for risk

Most corporate Bonds are rated for risk by credit rating agencies, such as Standard & Poor's, Moody's or Fitch, as follows:

Investment Grade (Prime)

Standard & Poor’s	Moody’s	Fitch
AAA	Aaa	AAA
AA+	Aa1	AA+
AA	Aa2	AA
AA-	Aa3	AA-
A+	A1	A+
A	A2	A
A-	A3	A-
BBB+	Baa1	BBB+
BBB	Baa2	BBB
BBB-	Baa3	BBB-

Non-Investment Grade (Non-Prime or Junk)

Standard & Poor’s	Moody’s	Fitch
BB+	Ba1	BB+
BB	Ba2	BB
BB-	Ba3	BB-
B+	B1	B+
B	B2	B
B-	B3	B-
CCC	Caa	CCC
CC	Ca	CC
C	C	DDD
D		DD
		D

Interest on Bonds

Bonds pay interest (the coupon), typically twice a year. Interest can be either at a fixed rate or at a floating rate relative to the bond.

You may also come across zero-coupon Bonds which pay no interest but which are issued at a discount to the value on maturity, creating a capital gain.

Maturity

Bonds are also categorised according to their term or maturity date

• 5 years for a short-maturity Bond
• 5 to 15 years for a medium-maturity Bond
• 15 years or more with a long-maturity Bond

Tax

Interest is taxed at source for Bonds at the basic rate. Non-taxpayers can reclaim the tax deducted and higher-rate taxpayers will be assessed for the additional tax due as part of their annual return.

If held within an ISA, Capital gains on Bonds are free of Capital Gains Tax and you receive 20% tax credit on coupon/interest paid.

What if I want to sell before the redemption date?

If you sell your investment before the redemption date, you may get back less than you originally invested. Call our Dealing team on 01296 41 42 43 to obtain a price.

Investment carries a variety of risks

We understand that investing isn't right for everyone. It's well known that investments, their value and the income they provide can go down as well as up and you might not get back what you originally invested. If you're not sure about the suitability of an investment please contact our Advice team.

01296 41 41 41