Investment Bonds

What are bonds?

Bonds are Debt Securities that are publicly traded evidence offer a promise to pay back an amount to the holder of the security. Investment Bonds are issued by companies, governments, government agencies and municipalities.

By investing in bonds, you are effectively lending money to a company or institution and they will repay that debt (subject to credit risk of the issuer). Sometimes you specify a fixed rate of interest (known as the coupon) to be repaid at an agreed time in addition to the original sum (known as the principal). There is a wide range of investment bonds available and some come with variable rates of interest and no maturity date. You can also trade bonds on exchanges or over the counter (OTC) with other brokers.

Why would you invest in a bond?

Investment bonds should be considered by people who have the following goals or face the following situations:

• Save over the medium to long-term
• Capital growth
• No need of access to the cash they have invested in the bond over the short term

Bonds are rated on the basis of how likely the issuer is to default, so selecting which rating level of bond to invest will depend on your attitude to risk.

• Government bonds (known as gilts) are lower risk and therefore pay a low level of interest (coupon).
• Emerging market bonds are also government bonds, but they are classed as higher risk because they are issued by governments in countries that are less developed.
• Investment grade bonds are those that are rated highly by credit rating agencies and are very often large companies with a low risk of defaulting on their debt obligations. They usually pay a higher level of interest than government bonds as, although it is unlikely the company will default, the level of risk is still greater than with a government bond.
• High yield bonds (also called junk bonds) are those with a lower credit rating than investment-grade bonds. Because of the higher risk of default, these bonds are high yield bonds than investment grade bonds.