Gilts and bonds

1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17   

5. Bonds as tradeable instruments

When you own a bond, you are not stuck with it for life. Bonds, like shares, are 'negotiable' which means that during the loan period they can be sold from one person to another at whatever price the parties agree.

This tradeability is what distinguishes bonds from other types of loan investment. Imagine you 'lend' money to your local bank by putting it in a deposit account at 5% interest. The one thing you cannot do is sell that account on to someone else.

With bonds you can.

• If you own bonds but don't want to keep them to maturity, you can sell them
• If you want to own bonds, you can buy them 'second hand' from someone who wants to sell them

The price you pay and the price you get will be the market price of the bond, not its nominal price. The market price may be at a discount to (i.e. lower than) the nominal price, or at a premium to (i.e. higher than) the nominal price.

• A bond with a nominal value of £100, selling for £115, is trading at a premium.
• A bond with a nominal value of £100, selling for £85, is trading at a discount.

Later in this course we'll look at the factors which affect bond prices, but now, the point to grasp is that two different investors who own the same bond, but who bought at different prices, will experience different returns or, as it more commonly known, 'yields'. The relationship of price to yield is central to bonds, and explored further on the next page.

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