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Gilts and bonds

Introduction| Course| Q&As | Recommended reading| Quiz | 803

2. Different types of issuer

Issues fall into two broad types:

1. Governments

   Government bonds issued by industrialised economies of the US, Western Europe and Japan are usually very safe. Ditto the bonds issued by the European Investment Bank. There is virtually no risk of default on interest or capital payments. Sometimes gilts will have the words 'Treasury' or 'Exchequer' in their name, but there is no particular difference between the two.

   The same is not true of other sovereign bonds, particularly those of emerging market countries where the risk of default can be high.

2. Companies

   Corporate bonds are more risky than US and UK government bonds, but the degree of risk varies from one company to another. Some companies, with strong finances and robust businesses, are almost as safe as government bonds. Others are more speculative.

Rating agencies like Standard & Poor's and Moody's exist to guide bankers and investors in pricing bonds. They analyse the finances of big companies and assign 'grades' to them.

• An 'investment grade' rating (BBB or above) is a great asset to a company because it means that if it wants to issue new bonds, it can get away with paying a low rate of interest. Its cost of borrowing is therefore low.
• A rating below investment grade makes it more expensive for a company to issue bonds. To persuade investors to take on the extra risk, it will have to pay a higher coupon.

In general the yield on corporate bonds is higher than the yield on government bonds, to compensate for their extra risk, volatility and illiquidity. As with all investments, return and risk go hand in hand.

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

Recommend Reading

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

Click here for the ratings assigned by Moodys and Standard & Poors which indicate the level of risk of a bond.

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