Precipice / High Income Bonds
Precipice, or high income, bonds are another form of stock market-linked investment. These bonds offer you a regular income from your investment for the duration of the agreed investment period. At the end of this period, your initial capital is repaid to you in line with its value based on the stock market index in which it was invested. Typically, high income bonds require an investment period of between three and five years. You may be offered an annual income based on a percentage of your invested capital, for example eight percent. An investment of ten thousand pounds would entitle you to guaranteed an annual income of eight hundred pounds. The initial capital is invested and depending on the growth of these investments, is paid to you with returns at the end of the investment period.
However, the advantages that high income bonds offer, namely a regular income and the potential for good stock market investment returns, are somewhat counterracted by the risk that they involve. There is no guarantee that you will make good investment returns, since the future of the stock market indexes are unknown, and there is no guarantee that the total value of your invested capital will be returned to you at the end of the investment period.
The reputation of precipice bonds has been damaged since it was revealed that the risks involved had not been fully explained to many investors, who were unhappy when their original investment declined in value, or even lost its value altogether. Your capital often has only limited security, and can lose value when the stock market indexes decline; your capital may even reduce in value automatically if the stock market index to which it is linked falls beneath a certain level at any time during the investment period. In 2003, the Financial Services Authority (FSA) issued strict guidelines on how precipice bonds should be sold, in the aim of alleviating any misunderstanding regarding the potential losses for customers.
It is important to consider the potential risks involced in any investment, and it is vital that you do not risk capital on the stock market that you cannot afford to lose. However, if you are prepared to invest money with some risk but would prefer a long term investment that pays you an income, high income bonds may prove a reasonable choice. Remember however that you may be required to pay additional charges for the management of your bonds, and that if interest rates on regular savings accounts are high you may find that they offer you a good but secure investment opportunity.
