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Market & Prices - Fixed Income
Risk Warning When buying gilts and/or bonds, you should consider the issuer's credit rating and their ability to repay their debt. This will have a direct bearing on the value of the investment. Should the issuer default, they may not make interest payments or be able to repay your money.
Fixed income investing
With a share you own part of a company, but with a bond you are effectively lending that company money. National governments also sometimes issue bonds in order to borrow money.
In return for your investment, the bond issuer pays you a fixed amount of interest on an agreed date or dates. Sometimes referred to as ‘fixed interest securities’, bonds are therefore useful if you are seeking a regular income. The longer the bond’s redemption period, the higher your return might be.
When an investor purchases a bond they become a creditor to the issuer and therefore has a higher claim on any assets than a shareholder might have. However, unlike a shareholder, bond holders have no rights to vote or share in any profits earned.
Gilt-edged securities, often referred to as gilts, are bonds issued by the UK government. In exchange for your money, which is effectively a loan, they agree to pay you interest – either at a fixed rate or linked to inflation.
Gilts are considered by many to be a safer investment due to the lower likelihood of the issuer defaulting – although of course this cannot be ruled out.
Corporate bonds are considered the highest risk among bonds because their issuers are considered to be at a greater risk of not honouring their commitments. They therefore offer a higher yield in order to entice investors.
Issued by local authorities and companies, bonds are a way for companies to raise finances for business initiatives with less onerous terms than borrowing from banks.
Convertible bonds are less readily available than standard corporate bonds. They give the investor the right to exchange their bond into shares in the issuing company. Because this option is seen as more attractive to investors they may offer a lower interest rate.