Gilts and bonds

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1. What are bonds?

Bonds are IOUs issued by governments and companies.

• For the government/company, they are a way of raising money, and an alternative to taxation (for governments) and share issues (for companies).
• For the investor, they are an alternative to shares, cash deposits and other types of income-producing asset.

The basics of bonds are very easy. Every bond has a number of key features:

• Name of the issuer e.g. Universal Industries plc.
• Nominal or 'par value' of the bond e.g. £100. This is the amount that is returned to the investor when the bond matures.
• 'Coupon'. This is interest rate that the issuer promises to pay the bondholder. If the coupon is 5%, the bondholder will receive £5 interest per year on each £100 bond. Most bonds have a fixed interest rate, but some have an adjustable or floating rate where the payment is based on an underlying index.
• 'Payment dates'. Most UK government bonds (gilts) pay twice per year, at six month intervals. Corporate bonds pay either once or twice per year.
• 'Maturity'. This is the date on which the loan ends and the issuer has to pay the bondholder the nominal value of the bond. Also known as the 'redemption date'.

An investor who buys a bond, either when first issued or in the secondary market, becomes a creditor of the issuing government or company on the terms specified in the bond.

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