Gilts, unlike shares, tend to change price in unison. When one goes up, they all do. When one goes down, they all do. The reason is simple. Their prices are influenced by the same factors: interest rates and inflation. Corporate bonds, at the top end, are also largely influenced by interest rates and inflation.
In terms of selection, then, you don't have to do the fundamental analysis on these kinds of bonds that you would when buying shares in a company. What you may consider doing is to pick a bond with the risk, income and capital appreciation, and term characteristics that suit you.
Risk
If you want minimum risk, consider buying gilts. If you're prepared to take more risk for better yield, consider investment grade corporate bonds. But take advice on their creditworthiness, and steer clear of bonds below investment grade.
Income & Capital Appreciation
If you are a non-taxpayer, high-coupon bonds may suit you. They will pay you the highest rate of interest and it is paid gross. But remember to look at the current yield (income divided by current price), not just the nominal yield.
If you are a higher rate taxpayer, a lower coupon bond trading at a discount may be better. The income yield may not be very good, but if you hold them to redemption you have a surefire capital gain which is tax free.
Note that just because a bond is trading at a premium doesn't make it a bad income investment. If it has a high nominal yield (perhaps issued at a time when interest rates were high) it may well provide a better overall redemption yield than one trading at a discount, even though there is an inbuilt capital loss. Consider two examples:
Example »
A 12% £100 bond, trading at a premium of £110, maturing in 5 years time
Example »
A 5% £100 bond, trading at a discount of £95, maturing in 5 years time
Finally note that with corporate bonds you have a double chance of capital appreciation: firstly if interest rates fall, the bond price may move up; secondly if the company's underlying finances improve, its credit rating may improve which may also result in a price increase.
Term
The term of a bond affects its price and volatility. Gilts are divided into four categories:
Obviously, a 20 year gilt will start out as a Long, then become a Medium, then finally a Short.
In general, the longer the borrowing period, the higher the yield and the more volatile the price of the gilt. The higher yield is a recognition of the uncertainty inherent in a long borrowing period. As the gilt shortens, its yield usually drops. Hence the standard 'yield curve'.
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