Bonds(6) These are also called Gilts (for Gilt Edged Securities) because Government bond certificates were originally edged in gold. In general, Government bonds or Gilts are issued by the Government to raise money. These are considered very safe investments since historically the British Government has never failed to redeem a Gilt. As with savings bonds, Gilts are fixed interest rate securities.
Gilts are classified according to the term involved:
Furthermore, there are Undated Gilts which pay ongoing interest and have no date of maturity. Undated Gilts have a low rate of interest and are generally not redeemed except in cases of fast decreasing interest rates.
Finally, there are also Index-linked Gilts which are tied to the inflation rate.
The interval of dividend pay-outs depends on the type of Gilt. Also, maturity dates, prices and rates of interest all vary according to the kind of Gilt.
Corporations may also issue out bonds. Usually corporate bonds have fixed interest rates and, similar to Government bonds, are also issued in order to raise capital.
The pay-out of this kind of bond is generally a sum greater than the initial value upon the bondfs maturity. For corporations, offering bonds is a more cost-effective way to raise money than arranging for a bank loan.
As corporations may go bankrupt or incur losses to the point they are unable to redeem the bonds they issue, corporate bonds are considered a greater investment risk than Government bonds. This being the case, the potential returns from corporate bonds are much higher compared to Government-issued bonds. Also, corporate are relatively less riskier than investing in stocks and shares.
When investing in corporate bonds, keep in mind their volatile capital value which is affected by changes in interest and inflation rates. Also, the interval between dividend payments varies between corporate bond products.
Generally, corporate bonds are only available to fund managers who include them in a larger investment package (e.g. ISAs and PEPs).
This may be considered as a kind of savings account, however since your investment is locked for a particular length of time, savings bonds generally offer more competitive rates than Notice or Easy Access Accounts. Penalties are often applied to withdrawals, should the particular savings bond have provisions for it. In general, savings bonds are best suited to investors looking for a low-risk product that offers good interest rates in exchange for limited access to their funds until the bond matures.
Investments are usually at least 1,000 and come with a fixed rate of interest. There is a requirement that the holder be at least sixteen years of age, otherwise the bonds may be held on their behalf by a person who meets the age minimum.
There are two kinds of savings bonds commonly available:
Stepped Rate (or Escalator bonds)
These bonds guarantee stepped interest rates over a certain time period, which means that the interest increases in set intervals. Stepped rate bonds may offer an advantage over fixed rate bonds with the same term, although this depends on the particular product.
Fixed Rate
As the name implies, these bonds feature guaranteed fixed interest rates for the duration of the investment, which often extends from 1 to 5 years, or even longer for certain products. A higher interest rate often applies to longer terms. The money put into the bond is usually locked and cannot be withdrawn in any amount until the end of the term, or the bondfs maturity.
The advantage of fixed rate bonds is the guarantee that your initial investment will remain intact. However, this being the case, interest rates are relatively lower compared to other types of investments that involve greater levels of risk.
A with-profits bond is the term associated with life assurance plans that put your investment in a with-profits fund. With-profits bonds distribute your money across different types of investments (e.g. shares, cash deposits and fixed interest securities) in order to balance out the constant losses and gains dealt by the overall market.
The idea behind this is to reduce the amount of risk while maximising the return on your investment. This puts with-profits bonds at a risk level above traditional savings accounts, but still below the volatile equity funds market (e.g. stocks and shares).
A fund manager invests the capital pooled from the funds of the policy holders. The capital is spread out among a diversified portfolio of shares, securities and stocks.
Every year, the life assurance company declares a reversionary bonus rate that is applied on a daily basis to the participating policies. The companyfs actuarial department derives the bonus rate from how much it assesses the fund will earn after all related expenses and costs are accounted for. The reversionary bonus rate is not guaranteed and the amount depends on many factors. However, once it is applied it is not taken back. The current bonus rate is commonly around 5.5%.
Although considered as medium to long term investments, with-profits bonds do not have fixed terms. Withdrawals are typically not allowed until five years have elapsed; after this period, regular withdrawals are permitted. Usually, withdrawals of up to 5% of the initial sum are tax-exempt, and the arrangements are often flexible so you can opt to schedule withdrawals annually, bi-annually, quarterly or even monthly.
Keep in mind however that some established IFAs are advising against with-profits bonds for new investors, given the present and forecasted conditions of the stock market that may make other investment options more profitable.
A Guaranteed Equity Bond is an indirect, low-risk method of investing in the stock market. GEBs assure the return of your initial capital but do not offer the same potential level of profit of a direct investment.
GEBs have terms of 5 to 6 years and use different global stock market indices, depending on your provider, to track the growth of your investment. Either one particular index or an average of multiple indices from the global stock market is used.
These indices include:
GEBs vary widely. Overall growth is often capped, either on an annual basis or on the final return. National Savings and Investments offer a GEB that offers a return equal to 95% of the overall growth of the FTSE over a period of five years, otherwise your original investment is returned.
Aside from their 5-year GEB, income bonds are also offered by NS&I. This type of bond has a regular monthly pay-out that varies depending on the interest your investment earns.
NS&I income bonds may be from 500 to 1,000,000. Other companies offer income bonds as well, in their own respective amounts.
Interest rates are variable and is paid out gross, and may be transferred directly to your bank account.
NS&I income bonds are considered low-risk as they are supported by the HM Treasury. And although there is a required notification period of three months to avoid a 90 day interest deduction, bonds may be cashed with no other restrictions.
Despite the lower risk factor, income bonds are subject to declines in interest rates which will lower your monthly pay-outs. The value of your investment is also affected negatively by a rise in inflation rates.
NS&I offers premium bonds which cost 1 each. Sold in multiples of 10, buyers are allowed to purchase a maximum value of 30,000, or a minimum of 100.
There is an age requirement of 16 to purchase, but may also be bought on the behalf of children under 16 by a parent, grandparent, great grandparent, or guardian. Prize draws are held every month, with a wait time of thirty day after purchase for your bonds to be entered.
ERNIE (Electronic Random Number Indicator Equipment) generates the numbers that are drawn. These numbers are checked at every monthly draw by the Government Actuary (independent of NS&I) to verify that the randomness of the results.
Prizes range from 50 to 1m, all tax-exempt, and the odds of winning are increased by purchasing more bonds.
Unlike a lottery, your investment is guaranteed and you can redeem it at any time. However, premium bonds do not earn any kind of interest, thus the only return that is offered is anything won as a prize. More information is available at the NS&I website. (
Many other kinds of bonds are available that do not fit squarely in the aforementioned categories, as well as multiple variants of the kinds of bonds that were discussed. Bonds may also be offered or simply included as part of a whole investment package. As always, consult your IFA first regarding which investment package best meets your particular needs.

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