BONDS GUIDE Considered by many to be a vital element in any financial plan, bonds can be used to help you grow your wealth. In this bonds guide we take a look at financial bonds: explaining how bonds work; the vital factors you should consider before making bonds investments; and strategies to consider when making bond investments.

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Bonds Guide: Bond Investments Explained
Consideredbymanytobe a vital elementinanyfinancial plan,bondscanbe usedto helpyougrow your wealth.
In this bonds guide we take a look at financial bonds: explaining how bonds work; the vital factors you should
considerbefore makingbondsinvestments;andstrategiestoconsiderwhenmakingbondinvestments.
BondsExplained:Whatisa bond?
A bond is effectively an “IOU” that is issued by a company or government in an effort to raise capital. The idea is that
an investor will buy the debt and in return the issuer of the bond makes a promise to pay a set level of interest every
year:plusreturningthe capital at an establisheddate inthe future.
With a bond, a fixed amount is paid out: and there are two main types of bonds to choose from – gilts and corporate
bonds.
– Gilts: These are government bonds that are usually considered safer than corporate bonds as a government is
usually less likely to default on debt or go bust. They are available as short- or long-term investments: indeed you
couldevenfindgiltswithtermsof 50 years.
– Corporate bonds: More speculative than gilts, corporate bonds are usually considered less risky than equities.
Should a company go out of business or default on a debt then there is a risk that the investor will lose their money –
however,corporate bondholdersare alsomore likelytogeta payoutcomparedto shareholders.
BondsExplained:Howare bondsrated?
Bonds receive grades based on their credit risk: if they are rated AAA-BB then they are considered investment-grade
bonds and are usually issued by large companies and governments. Meanwhile, those rated from BB-D are
consideredhighyieldbonds(alsoknownasjunkbonds),whichtypicallypayahighlevel of interest.
It is possible for bond prices to vary: with investors needing to pay close attention to yields, which indicate the
interest payable, expressed as an overall percentage of the price of the bond. So if you have a corporate bond valued
at £1,000 paying five per cent interest over five years the yield would be five per cent. However, should the bond’s
value dropto £900 thenthe yieldwouldrise to5.6 percent.
Perhaps of significant importance is that bonds do not have any major association with stocks: meaning that in the
eventthatequitiessink,bondvalueswillnotnecessarilybe affected.
BondsExplained:Howtoinvestinbonds

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There are several possibilitieswhenit comestoinvestinginbonds,including:
– Buying individual corporate bonds: This can be done using a stockbroker or, in some cases, you may be able to buy
directly from the company. This is, however, considered to be a risky strategy because if the bond’s value were to
drop or the companywere to defaultonaninterestpaymentthenthe investmentwill be rocked.
Generally, this strategy was beyond most private investors: however, this changed when the Order Book for Retail
Bonds was launched on the London Stock Exchange in 2011. From 2012 onwards, several companies have offered
retail bonds with low investment requirements: this was done in an effort to find private investors, including ISA
investors.
– Dedicated bond funds: This is often a more diverse way for first-time investors to access bonds. Here it is very
important to employ the services of a bond manager who can guide you on when to buy a bond. There are different
types of bond funds available including those focused on high yield bonds; investment grade bonds and a
combinationof the two.
BondsExplained:Keybondfeatures
There are some keytermsthatare importantto understandbefore investinginbonds.These include:
– Principal: Refers to the amount on which an issuer will pay interest. Usually this must be repaid at the end of the
term.
– Maturity: An issuer has to pay a certain amount on a maturity date. If all due payments have been made then the
issuer will have no additional obligations. The time until a maturity date is known as a term. Maturities can be any
lengthof time:mostbondshave a termup to 30 years.
– Coupon:Thisisthe interestrate thatan issuerwill paytothe holder – itis usuallyfixedforthe bond’stenure.
– Yield: This is the rate of return picked up from a bond investment. It can refer to: the current/running yield, the
annual interest payment divided by the existing market price; or the yield to maturity, which considers the market
price and the timingof remainingpayments.
– Credit quality: This reflects the probability that bondholders will receive the promised amounts on the due dates.
Thisdependsona numberof factors.
– Market price: Prices of tradable bonds can be influenced by a number of factors, including: currency, timing and
the level of interest payments. Prices can be either “dirty” or “clean”. Dirty focuses on the present value of future
cash flows with accrued interest included; whereas clean does not include this accrued interest. Generally, dirty is
usedinEurope and cleaninthe USA.
BondsExplained:Whattoconsider
Before you invest in bonds think first about why corporate bonds are right for you. For example, are you lookingfor
themto add income flow;forareturn withlowrisk;or are you lookingtodiversifyyourinvestmentportfolio?
Corporate bonds are often a good feature of a diversified portfolio, particularly among cautious investors. However,
they do carry the risk of capital loss so they are not a direct replacement for cash. As such, cautious investors should
be careful not to holdtoomanybonds.