Methods of investing: bonds

Bonds are in effect the process whereby you loan a company or the government money, and you get some sort of IOU in return. Clearly in order to make it attractive for you to give them your money, they pay you back the full amount and there is also interest on it, so that you should receive back more than you give them.

This interest is usually at a rate that is fixed in advance at the time that you decide to take the bond, and so bonds are typically referred to as "fixed income" investments. This of course contrasts with shares whereby no-one knows what the prices are truly going to do and can be very variable indeed, leading to riches for some and rags for others.

Corporate bonds are those that companies issue to raise finance - think of the link between corporate and companies. Governments issue bonds that are called sovereign bonds, and those in the UK are referred to as gilts as they used to literally be gilt edged, or lined with a thin layer of gold. Government bonds are traditionally thought safest as being backed by the government it would have to default in order for you not to receive your money back.

These days bonds get traded during their lifetime. There is a whole market for this. So factors such as the general demand for bonds, the attractiveness of the company that issued the bond and the market sentiment on interest rates will all affect, ultimately, the investment return on bonds. Private individuals have traditionally bought gilts, the government bonds, although it is gradually getting easier to purchase some corporate bonds with the advent of the internet and the number of markets private individuals are afforded access to through this medium.

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Methods of investing: bonds

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