Fixed Interest Securities (Bonds)

Bonds are a type of IOU issued by governments and large corporations in order to borrow money. Bonds typically pay out a fixed income over a known period of time combined with a fixed capital repayment on maturity. These investments have varying durations ranging from short-dated (under 5 years) to long-dated (over 15 years). Some issues are undated and can only be redeemed at the discretion of the issuer. The capital value of a bond changes during its lifetime as it is traded by investors.

Fixed Interest Securities (Bonds)

Factors which can affect bond values are:

  • Supply and demand
  • Economic outlook
  • Credit environment
  • Actual and expected changes in interest rates
  • Actual and expected changes in inflation

Government Bonds - UK and overseas

Government bonds issued by central governments of countries (e.g. UK gilts, US Treasuries) are traditionally considered to be the safest type of bond as they are backed by government guarantees and there is a very low risk of default, except for financially unstable countries. Bonds issued by supranational agencies, such as the World Bank or the European Investment Bank, are considered to be as safe as those issued by central governments.

Index- Linked Government Bonds

Both interest and capital redemption payments are linked to a measure of inflation, such as the Retail Prices Index (RPI) in the UK. This provides protection for the original investment against the effects of price inflation.

Corporate Bonds - Investment Grade

Corporate bonds are issued by companies. They are sometimes referred to as "credits". Corporate bonds offer a higher yield than most government issued bonds as companies need to provide investors with potentially higher returns to compensate for the additional risk of default involved. In the event of a company becoming insolvent, bond holders rank above share holders as creditors. Most corporate bonds are rated by independent credit rating agencies. The highest rating is AAA which indicates that a company is viewed as financially very strong and unlikely to default on its payments to bond holders. The lowest rating within "investment grade" is BBB.

High Yield - Non-Investment Grade

High yield corporate bonds cover the higher risk sector of corporate bonds, in particular, those rated as non investment grade. This includes bonds rated BB and below. High yield bond issuers have to offer greater potential returns to investors than investment grade corporate bond issuers due to the higher risk of default.

Emerging Market Debt

Emerging market debt includes bonds issued by governments and corporations of less developed countries. They tend to offer higher returns to compensate for the increased economic and political risks compared to developed countries. Some of the largest issuers in the emerging market debt sector are Brazil, Mexico and Russia.

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