Gilts and bonds

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3. Different types of bond

This page provides an 'at a glance' summary of the different types of gilt and bond.

1. Dated Gilts
   Gilts are UK government bonds, and dated gilts are those which have a predetermined redemption date. e.g. 'Treasury Stock, 5%, 2006' means that they mature in 2006. Sometimes the government gives itself a choice of redemption date. e.g. 'Treasury Stock, 5%, 2006-2008' means that it could choose to repay in any one of three years: 2006, 2007 or 2008.
2. Undated Gilts
   Undated gilts are gilts which do not have any redemption date. The government just continues to pay holders the same level of interest on the nominal price year after year. As inflation eats away at the nominal price, so the real value of the interest paid will become less and less. £100 ten years ago could buy more than £100 now. For this reason undated gilts tend to be unpopular with investors.
3. Index-Linked Gilts
   These are dated gilts with a twist: the interest which the holder receives rises and falls in line with inflation, as measured by the Retail Price Index. Investors who fear rising inflation will be attracted to index-linked gilts because of the income protection they offer.
4. Yearlings
   Yearlings are local authority bonds which normally have a life of 1-2 years. Often they are issued to finance a particular project which the authority wants to undertake. Yields tend to be higher than for central government bonds, because the risk is considered greater.
5. Corporate Bonds
   Companies issue corporate bonds to raise capital. Sometimes the bonds are referred to as loan stock. The bonds may be secured on specific company's assets, which means that in the worst case bondholders can force the sale of those assets to force payment, or they may be unsecured.
6. High Yield Bonds
   Also known as junk bonds, these are bonds issued by companies who's credit rating is below 'investment grade'. Put another way, the risk of default is relatively high, and the bonds pay a better rate of interest in order to persuade investors that the risk is worth taking.
7. Convertible Bonds
   These are corporate bonds which holders can convert into the company's ordinary shares on payment of a predetermined 'conversion premium'. Whether converting makes sense depends on the relationship between the current price of the convertible, the conversion premium, and the current price of the shares. Convertibles tend to pay a lower rate of interest than ordinary corporate bonds.
8. Zero Bonds
   These are corporate bonds which pay no interest at all, but which are sold at a substantial discount to their redemption value. i.e. you pay £600 for a bond which a nominal value of £1,000, and if you hold it to maturity you get paid £1,000.

1. What are bonds? 2. Different types of issuer 3. Different types of bond 4. Bonds compared to shares 5. Bonds as tradeable instruments 6. Nominal yield 7. Calculation of current yield 8. Capital gains on gilts and bonds 9. Calculating the redemption yield 10. Factors which affect bond prices 11. Are bonds for you? 12. Selecting gilts and bonds 13. How to buy gilts and bonds 14. Unit trusts and bond funds 15. Keeping track of your bond investments 16. Tax 17. Conclusion

• First Steps in Bonds
• Beating the Dow with Bonds
• Pricing Convertible Bonds