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Bonds, bonds, bonds, bonds: what do they all mean?
There are four types of bonds in the financial world. Here's a quick guide to help you tell them apart.
by Gavin Lumsden on Jul 26, 2013 at 16:01
If the word bond makes you think of James Bond, this video guide is for you.
There are four different types of bond in the financial world, and it is important not to mix them up!
This is the latest video in the The Lolly Investor Programme, a weekly series aimed at beginner investors.
You can watch my recent videos and get links to all the programmes here.
Can't watch now? Read my script instead
The financial services industry has a terrible habit of confusing people with a load of terms and expressions we don’t understand.
But there are times when financial companies don’t use enough words.
I’m thinking of the word ‘bond’ which has four very separate meanings.
In the olden days traders on the London Stock Exchange were supposedly fond of saying ‘my word is my bond’ as they struck deals with each other.
But that doesn’t help most of us who hear the word and think of James Bond, the fictional spy who would have been a regular visitor to MI6 here in real life.
So what are bonds in the financial world?
For your eyes only here is my whistle stop tour to bonds.
Bond. Savings bond.
Doesn’t have quite the same ring does it?
Our first type of bonds is the fixed rate savings account offered by banks and building societies. Savings bonds fix interest rates for different periods up to five years. You get a higher rate the longer you lock your money away. You can take your money out before the bond matures but you’ll lose most of the interest.
Interest rates on savings bonds have been poor for some time so you’re not going to become Goldfinger using them.
Next investment bonds.
I’m standing outside the house in London’s Mayfair where Ian Fleming, the author who created James Bond, was born. His grandfather Robert Fleming founded an investment bank of the same name but I’m not sure what he would have made of investment bonds, which are savings plans designed for one off, lump sums of money.
Investment bonds are a bit like ISAs and pensions. They’re an account, which comes with some tax benefits in which you can put other investments. These investments are usually a choice of funds investing in the stock market The trouble is their tax breaks aren’t as good as an ISA or pension. The investment bond provider pays basic rate tax on the income and capital gains your money makes. And you can’t claim back that tax.
However, some higher rate tax paying savers like them because you can withdraw up to 5% of your original investment a year without paying extra tax.
Speaking of tax I’ve come to the Treasury, on Her Majesty’s Secret Service!
The Treasury, as well as deciding how much tax we all pay, also backs a government savings institution known as NS&I. NS&I issues Premium Bonds, which instead of paying interest to savers pay tax-free prizes to a small number of people every month. Prizes range from £25 to £1 million which might sound good but the odds are premium bonds won’t make you rich either.
The last stop on our tour is Admiralty Arch. Ian Fleming worked at the Admiralty during the war. It’s just a stone’s throw away from the Treasury which is good because the Treasury is connected with our fourth type of bonds.
Government bonds and corporate bonds are loans issued by governments and companies when they want to borrow money from investors. There is a vast market in trading in these bonds which offer a fixed rate of interest and – if they are held to maturity – the promise of your money-back. Private investors can buy government and corporate bonds through a stock broker. Generally though, bonds like this are held by some of the investment funds you might put in your ISA or pension.
That’s it. You may still think Diamonds are Forever but at least now you know what bonds are!
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by Gavin Lumsden on Apr 16, 2014 at 15:17