Bonds

Bank and Building Society Bonds

Many banks and building societies offer their own range of bonds. These are designed to be easy to understand and simple to buy, and will usually offer a fixed interest rate for an agreed investment period. The length of the investment period varies between bonds and between institutions, but typically bonds are sold with terms between three months and five years. There will usually be minimum and maximum limits on the amounts that can be invested. These bonds offer guaranteed returns at low risk: there is no chance that the capital invested will be lost. However, if average interest rates increase dramatically over the investment period, your capital might lose out on higher returns. Your capital is invested for the duration of the term, and you will usually face charges if you wish to withdraw your funds before the end of this period. Instant access to funds via an electronic account card is not possible.

Bonds offered by financial institutes enable savers to invest in varied saving products, and withdrawal restrictions help customers manage their finances: preventing spontaneous spending and creating a contingency fund for the future.

Guaranteed Income Bonds (GIBs)

Guaranteed Income Bonds are a secure investment sold by insurance companies, offering fixed returns at no risk to the capital: if the insurance company becomes insolvent and cannot repay you, you are entitled to claim compensation of up to two thousand pounds in addition to ninety percent of the value of the bond. You can choose to receive your investment returns on a monthly basis as an 'income' or reinvest these returns with the bond, and receive the original capital and the returns made at the end of the investment period. These returns will be subject to tax deductions.

There are usually no charges associated with the bonds, and you will not have to pay administration fees. However, you will face penalties if you wish to withdraw your capital before the end of the agreed investment period. There are usually minimum and maximum restrictions on the amount that can be invested in Guaranteed Income Bonds: typically these limits are a minimum of five thousand pounds capital and a maximum of one million pounds. These bonds offer guaranteed returns at low risk: there is no chance that the capital invested will be lost. However, if average interest rates increase dramatically over the investment period, your capital might lose out on higher returns.

Corporate Bonds

Corporate Bonds are issued by corporations, or companies, and essentially represent a 'loan' to a company, in that you have invested money in their business without receiving a share in their profits (a share certificate) in exchange. The capital you invest will be returned to you at the end of the investment period, typically between one and ten years, and you are usually guaranteed a certain rate of return on your investment. If the company registers insolvency, bond holders have higher priority than shareholders for their funds to be repaid. However, it is possible that you could lose your invested capital if the company goes into liquidation and there is not enough money to repay bond holders.

Corporate bonds are bought and sold on the stock market and therefore their value can go up or down. Each bond has a nominal value of one hundred pounds. This is the capital that will be repaid to you at the end of the investment period, regardless of how much you actually paid for the bond. If you purchase a bond for one hundred and fifty pounds and the price of the bond falls during the investment period to ninety pounds, you will receive one hundred pounds back. If you purchase a bond for sixty pounds, you will receive one hundred pounds back at the end of the investment period. In addition to this returned capital, you will receive fixed investment returns. Corporate bonds are often offered as an investment opportunity by banks or building societies, but you can purchase bonds via the stock market with the help of a stockbroker.