What Are Bonds?

A bond is essentially a formal debt obligation, which can be issued by a government office or for-profit company to finance projects and initiatives.

The company issuing a bond is effectively borrowing money from the individual or corporation who buys it. The terms and conditions of the bond will specify the agreed rate of interest payable on the loan, along with when and how it needs to be repaid.

Individuals and companies who buy bonds are referred to as ‘lenders’ – investors who loan money by purchasing bonds, with the goal or turning a profit through the interest payable on the loan.

Basic Bond Characteristics And Terminology

Face Value

This refers to the total cost of the bond (or loan) that will be repaid by the issuer of the bond when it reaches maturity i.e. when the agreed loan period comes to an end.

Interest Rate

Interest rate refers to the interest payable on the funds borrowed, which the lender receives from the issuer in accordance with the terms and conditions of the agreement. Interest may be payable monthly, quarterly, every six months, or annually, though in some instances is collected in one lump sum payment when the bond matures.

Though rare, there are instances where bonds are issued as zero-coupon bonds, where no interest is payable at all.

Maturity

Loan maturity refers to the agreed date on which the total sum of the funds borrowed and the interest payable (where applicable) needs to be repaid in full.

Bond maturity timings vary significantly between different types of bonds. Anything from 1 year for a standard corporate property bond to 100 years for a governmental bond.

The Bond Issuer

The issuer of a bond is the individual or the company looking to raise funds for a specific project of venture. It is therefore essential to establish and assess the financial stability and credibility of the issuer, to appropriately control risk. Bonds issued by smaller and newer companies without an established track record or reputation are considered comparatively risky, whereas governmental bonds are typically the lowest risk of all, however, the risk attached to a property bond is usually reflected in the potential returns. Higher-risk investments typically translate to higher-profits when successful.

How Do Corporate Bonds Work?

Corporate investment bonds are issued by businesses looking to raise capital, which they agree to pay back on a specific date with interest.

The sum of the funds borrowed combined with the interest payment is referred to as the ‘yield’ i.e. the total sum of money repaid to the investor, including their profit.

Who Buys Corporate Bonds?

Bonds like these are popular investment vehicles for private investors and established investment firms. One of the primary points of appeal with property bonds is the way in which the outcome is usually quite predictable, and the risk level can be reduced through the provision of security known as collateral.

Corporate bonds and property bonds are typically recommended for experienced investors and high net-worth individuals only, however, newcomers looking for potentially low risk investment opportunities with minimal knowledge and experience with investment options can still succeed with corporate bonds.

How Do Investors Make Money on Bonds?

Investors make money on bonds by collecting interest payments, which are either paid by the borrower on a regular basis throughout the course of the agreement or in a single lump sum payment when the bond matures.

The longer the term of the loan and the higher the agreed rate of interest, the bigger the overall resulting profits for the investor.

For more information on any of the above or to discuss the potential benefits of purchasing bonds in more detail, contact a member of the team at UK Best Investments today on 0116 2168443 or email invest@ukbestinvestments.uk.