Bonds
Bonds are a type of fixed income investment. When you invest in a bond, you are lending money to a government, company or other organisation for a set period. In return, the issuer will typically pay interest and repay the bond’s face value when it reaches maturity.
Bonds can provide a source of income and may help diversify an investment portfolio. Their value can rise or fall, however, and the level of risk will vary depending on factors including the issuer, interest rates and market conditions. If sold before maturity, you may receive less than you originally invested.
Understanding Bond Risk
The level of risk associated with a bond depends on a number of factors, including the financial strength of the issuer, the bond’s maturity, changes in interest rates and market conditions. There is also a risk that an issuer may be unable to make interest payments or repay the amount due at maturity.
Credit ratings can provide an indication of an issuer’s creditworthiness and the ability to meet its payment obligations. However, ratings are opinions rather than guarantees and can change over time.
Generally, bonds with lower credit ratings carry greater credit risk and may offer higher potential returns to compensate investors for taking that additional risk.
Investment Risk
The value of investments can fall as well as rise and you may get back less than you originally invested. Past performance is not a reliable indicator of future performance. All investments involve risk, and you should ensure you understand the risks associated with an investment before making a decision.
Types of Bonds
Government Bonds
Issued by national governments to raise money. These bonds can offer a regular source of income over a defined period. The level of risk will depend on the financial strength and creditworthiness of the issuing government.
Corporate Bonds
Companies issue corporate bonds to fund their activities and growth. They can offer different levels of income and risk depending on the company and the terms of the bond.
Municipal Bonds
Issued by local governments and other public bodies. These bonds are typically used to finance public services and infrastructure products.
Key Features of Bonds
Face Value
The amount the issuer agrees to repay when the bond reaches maturity.
Coupon Rate
The interest rate paid by the issuer, usually expressed as a percentage of the bond’s face value.
Issuer
The government, company or other organisations that issues the bond.
Yield
An indication of the return from a bond, which can change as the bond’s market price changes.
Credit Quality
An indication of the issuer’s ability to meet its financial obligations, including interest and repayment of the bond.
Maturity Date
The date on which the bond is due to mature and the issuer is expected to repay its face value.
Why investors consider bonds
Bonds can provide a regular source of income and may offer another way to diversify an investment portfolio. Different issuers, maturities and credit profiles provide a range of income and risk characteristics for investors to consider.
