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There are two main types of bond, corporate bonds and investment bonds. It is important to understand the distinction between the two.
These are loans to companies, at a fixed rate of interest over a fixed term. So by investing in corporate bonds investors will receive the interest over the term, and should get their capital back at maturity.
These are not risk-free. If the company that raises the loan becomes insolvent, you are not guaranteed to get your full investment back. Corporate bonds are, however, less risky than investment in the shares of companies, since shareholders cannot receive anything back if the company is not in a position to fully repay its loans.
Investing directly in corporate bonds can be difficult for smaller investors. Additionally, you should note that you cannot get your money back from the company until the loan matures.
It is possible to sell corporate bonds before maturity, on the open market. However, if interest rates rise you are likely to get back a smaller amount than you paid. If interest rates fall significantly, it is possible that you may get back more than you invested.
Pooled funds are available, where your investment will be spread across a number of corporate bonds and managed by professional fund managers. These funds may also include gilts (loans to the Government) and other types of fixed interest security. These collective investments provide a convenient way to spread your investment and reduce overall risk.
Investment bonds are just a tax ‘wrapper’ for other investments. There are two types of investment bond: life assurance bonds and capital redemption bonds. Both of these can include many types of investment, including cash, stocks and shares, corporate bonds and other fixed interest securities, and property.
Your choice of type of investment should be the first priority. When that choice has been made, the choice of tax ‘wrapper’ should follow.
For help in choosing the right investments and the right tax ‘wrapper’, contact us.