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A Beginner’s Guide: How to Invest in Bonds

Bonds are a way to raise money. Bonds can be issued by companies or governments and generally pay a stated interest rate

In exchange for the capital, the company pays an interest coupon, which is the annual interest rate paid on a bond expressed as a percentage of the face value.  

The market value of a bond changes over time as it becomes more or less attractive to potential buyers.   

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How Does it Work?

The company pays the interest at predetermined intervals (usually annually or semiannually) and returns the principal on the maturity date, ending the loan. 

Maturity is often classified in three ways: 

  • Short-term: Bonds that fall into this category tend to mature within one to three years. 
  • Medium-term: Maturity dates for these types of bonds are normally over ten years. 
  • Long-term: These bonds generally mature over longer periods of time. 

Bonds that have shorter maturities tend to offer lower interest rates. 

How to Make Money from Bonds 

There are two ways to make money by investing in bonds.  

  • The first is to hold those bonds until they reach their maturity date and collect interest payments on them. Bond interest is usually paid twice a year.  
  • The second way to profit from bonds is to sell them at a price that’s higher than what you pay initially. 

For example, if you buy £15,000 worth of bonds at face value then sell them for £17,000 when their market value increases, you have made £2,000 profit. 

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What Kinds of Bonds Can You Invest in? 

  • Corporate bonds – as their names suggest, corporate bonds are issued by corporations. These tend to offer higher interest rates than other types of bonds, but the interest is taxable. Large corporations will issue corporate bonds to pay for a wide variety of initiatives, like scaling their business or funding research and development.  
  • Government bonds – (known as ‘Gilts’ In the UK) are bonds issued by government or national treasuries to raise funds. Government bonds are considered low risk as governments tend to have good financial stability so it’s likely that the conditions of the bond will be met.  
  • Savings bonds – these are offered by banks and building societies. Their low pricing makes them popular with retail investors, especially those with little experience of investing. Savings bonds are considered fairly low risk, but their value can fluctuate rapidly and the maturity terms are often lengthy.  

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How to Buy Bonds 

Unlike stocks, most bonds aren’t traded publicly. The process differs depending on the type of bond you’re buying. 

Everyday investors who are hoping to buy corporate bonds won’t be able to go directly to the issuer. You’ll need a stock broker to do this 

Savings bonds are bought directly from banks and building societies. You will need to open an account with the lender and deposit at least the minimum amount that they specify (£500 to £1,000 is standard). 

If you are based in the UK, you can buy government bonds (gilts) directly from the British government via its Debt Management Office online portal. The minimum investment is £100 and you can buy them in multiples of this, with lengths usually starting from just two years. 

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Pros of Investing in Bonds 

The advantages of investing in bonds are as follows… 

  • There are a wide range of markets to invest in 
  • They can offer regular interest payments 
  • You have the freedom to choose how long to invest for 
  • There are different risk levels available. 

Cons of Investing in Bonds 

The potential drawbacks of investing in bonds include the following… 

  • You can’t cash out of a bond before it expires 
  • Gilts and corporate bonds are not protected by the Financial Services Compensation Scheme 
  • Low risk bonds tend to come with low yields 
  • Some bonds, such as those issued by foreign governments, are difficult to buy. 

Are Bonds a Good Investment? 

If you need regular income from your investments, bonds might be an option due to the way they generate interest. Whether bonds are a good investment for you will also come down to what type of bond you’re looking at.  

Government bonds, for example, are low risk but usually offer a lower rate of return. 

Corporate bonds, however, can be a good investment if the issuer is attractive from a commercial standpoint. This can be determined through a thorough assessment of the firm’s cash flow, debt, liquidity and business plan. 

Ultimately, the question of whether bonds would be a good addition to your portfolio is one you should put to an independent financial advisor. They can assess your needs, circumstances and appetite for risk to establish the best outcome for you.  

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If you are looking to learn more about investing, contact our team at Count today to help you create the best strategy for investments going forward.   

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