Basics of bonds
The best way to understand bonds is to turn your head to gilts which are bonds issued by the government. They are called gilts as when they were first conceived the certificates had gold borders around each one. Gilts are a way the government pays for its expenditure without raising taxes, they also raise capital from national savings. Gilts are probably the safest investment you can make as you eliminate the risk of the company going bust as if the United Kingdom government failed to pay back all its debts and defaulted then angry investors would be the least of their worries.
Cautious UK investors also find gilts appealing as they are always denominated in pounds sterling. Gilts though can also be in various other currencies but with this comes an additional worry due to the fact that currency exchange rates change each day. When the government intends to issue new gilts they do various types of advertising to entice new investors. Some of the items they advertise are the amount that they intend to raise via the new investment, this is great for economists but not very helpful to potential investors. They also advertise the name of the gilts which the most popular of are treasury or exchequer gilts. There are many other names for different types of gilts with funding or conversion being the two most frequently purchased. The government will also advertise the rate of interest that they will be paid back at and this usually features in the title such as treasury eight percent.
The redemption date is another key element which they make available, this will highlight to the investor the date they will receive the full repayment of the capital they have invested. This statement will also be featured on the certificate when you receive it and will usually be seen as treasury eight percent 2019 which highlights the date at the end. Like shares gilts can rise or decline in value but the shorter the remaining life of the bond then the less risk of the price failing.
The main reaction of gilts comes from interest rates on government bonds. In the event of your bonds being close to the redemption date then the worry of them falling in value due to interest rates is very small. Unfortunately if you have a long life left on the bonds then you are playing with fire as anything can happen over a longer period of time. When you buy gilts either from the government or through a broker you are basically on your own, if you wanted to redeem the value of it before the redemption date then you will find that this is impossible so you may be forced to use brokers to trade them on for you which can accrue significant fees. The government does not ever have to issue new gilts and cannot be forced to by any party so if you are in the market for them but none are being issued then you are again forced to use various brokers to obtain them for you via the stock market.
When viewing various types of media such as newspapers or possibly the internet the price you will see will not always be the price they were issued at as you will in effect be using a middleman to purchase them for you which adds their fees onto the total amount you are charged per gilt which can mean you will lose a small amount when you sell and also pay a bit more when you buy. One extra small advantage in dealing with gilt is that you can be lucky and find the government will not charge you stamp duty on them but this is not the case all of the time.
