This is a financial promotion by Retail Book Limited (FRN 994238). Values can fall as well as rise. This information is not investment advice. It is intended for UK retail investors.
Ever wondered what happens when companies need to borrow money? They don’t always go to a bank. Instead, they often turn to investors like you and raise funds through issuing bonds. Bonds are one of the world’s most popular investments. But what are they, and why do they matter to you? Let’s break it down.
What Is a Bond?
A bond is a loan. When you buy a bond, you are lending money to a company or a government. In return, they promise to pay you back on a set date. This date is called the “maturity date.” Until then, they pay you interest and these interest payments are called the “coupons”.
How Do Bonds Work?
Think of a bond as an IOU. The company gets the money it needs. You get a steady stream of interest payments. When the bond matures, you get your original money back. You can hold the bond until maturity or sell it on the public market before then. The price of a bond can go up or down, just like shares, but typically with less volatility.
Key Terms to Know
- Principal: The amount you lend and get back at maturity. Also called “face value.”
- Maturity: The date when the bond matures and you get your money back.
- Coupon: The interest payment made to you, usually once or twice a year.
- Price: The amount the bond costs on the market. This can change over time.
- Yield: The return you get, shown as a percentage. The simplest way to think about yield is the coupon divided by the current price.
Why Do Companies Issue Bonds?
Companies issue bonds to raise money, using the funds to grow their business, buy another company, or develop a new product.
Why Do Investors Buy Bonds?
Bonds are a way to earn regular income. They are also seen as less risky than shares, but lower-rated or subordinated bonds can be more volatile and carry a higher risk of loss, and so it is important to do your research. Many investors use bonds to balance their portfolios. Did you know that the global bond market is even bigger than the global share market?
What Are the Benefits of Bonds?
- Stability: Bond prices usually move less than share prices.
- Income: Bonds pay you a predictable income, often once or twice a year.
- Diversification: Having both shares and bonds can reduce your overall risk.
What Are the Risks?
No investment is risk-free. Here are some risks to keep in mind:
- Interest Rate Risk: If interest rates go up, bond prices usually go down.
- Liquidity Risk: Some bonds are hard to sell quickly.
- Inflation Risk: If inflation rises, the value of interest payments and principal may fall in real terms.
- Default Risk: If the company or government cannot pay, you may lose your money.
- Subordination: Some bonds are riskier because they are paid after other creditors if the company fails. These usually pay higher interest to make up for the extra risk.
Bond Ratings
Bonds are often rated by agencies. These ratings show how safe a bond is. The highest ratings mean the bond is very safe. Lower ratings mean more risk, but with the prospect of higher returns. Investment-grade bonds are the safest but still involve some risk. Non-investment grade, or “junk” bonds, are riskier but pay more interest.
How Big Is the Bond Market?
The global bond market is huge, almost 15% larger than the global equity market, illustrating how important bonds are for both companies and investors. (Source: SIFMA Capital Markets Factbook)
Next Steps
Why Should You Consider Bonds?
Bonds are a simple way to earn regular income. They are less risky than shares, but they still carry some risk. If you want to balance your investments, bonds are a good choice. They can help you avoid big swings in your portfolio’s value.
Who Are Bonds For?
Anyone can invest in bonds. They are especially useful if you want steady income or want to reduce risk. If you are new to investing, bonds are a good place to start. If you already have some equity investments, they can help balance your portfolio. However, they are not appropriate for everyone. Consider your goals, time horizon and risk tolerance.
How Do You Get Started?
Many investment platforms and brokers offer bonds and regulatory change is transforming retail investor access. Just decide how much you want to invest and for how long. Read the offering documents and risk warnings before you invest.
What Should You Watch Out For?
Remember, all investments carry some risk. Bonds are safer than shares, but not risk-free. Don’t put all your money in one place. Use bonds as part of a balanced investment plan.
Final Thoughts
Bonds are a simple, secure way to invest. They offer peace of mind and predictable returns. Bonds can provide regular income, but they involve risks (including market, credit and inflation risks). Returns and capital values can go down as well as up, and payments are not guaranteed.
Risk Warning: Investing in securities involves risk, including loss of capital. Past performance is not a guide to future results. Always read the risk warnings and consult a professional adviser if unsure.
Retail Book Limited (“RetailBook”), a limited company registered in England and Wales (company no. 14087330) with its registered office at 10 Queen Street Place, London, United Kingdom, EC4R 1AG. RetailBook is authorised and regulated by the Financial Conduct Authority (FRN 994238).
