Query-corporate bonds funds...

C_Mababejive

Looking at ,for eg Mr Dampiers wealth 150 at HL...when looking at corporate bond funds of various types, why does the unit price go up and down? Isnt it just the case that bonds cost x amount and yield y amount until they need to be repaid? what accounts for the up/down movement? I'm thinking of course that whilst you should get a good return from investment grade products,the capital investment may swing negatively to counteract this?

Aegis

Corporate bonds are traded on the secondary markets after issue, with the income going to whoever owns them at the right time. As such, the price of a corporate bond at any given time will depend on a) the company's stability and therefore its ability to service its debt, b) the current general demand for fixed interest securities, and c) the yield compared to the risk free rate (or, more likely, a cash account for most people, as risk-free is usually taken to mean 3 month T bills, which aren't yielding a lot right now).

You only know exactly what you will receive when buying a corporate bond if you intend to hold it until maturity regardless of what happens with interest rates and markets.

xrjtg

The changing value of fixed rate assets is the equivalent of changing interest rates on savings accounts: since the interest payments are fixed the price of the bonds must change to achieve the same effect. So, in general, if interest rates rise then the price of bonds falls, and vice versa.

C_Mababejive

Thanks all...so if i buy into a fund which has only investment grade bonds and interest rates go up,then the price of the bond,or unit price,will fall to achieve the same return?? so in the end,the return is evened out? what im really asking i suppose is,what is the probability that i could i lose money on an investment grade bond fund and am i likely to do better than your average building society account?

Thrugelmir

You can but CB's direct. I believe with a minimum transaction value of £1,000.

This way you can control your own portfolio and receive a guaranteed return. As upon maturity the nominal value of the bond will be returned to you.

joerugby

C_Mababejive wrote: »

Thanks all...so if i buy into a fund which has only investment grade bonds and interest rates go up,then the price of the bond,or unit price,will fall to achieve the same return?? so in the end,the return is evened out? what im really asking i suppose is,what is the probability that i could i lose money on an investment grade bond fund and am i likely to do better than your average building society account?

Have you thought about equity income funds?

C_Mababejive

I think im already a bit over exposed in equities.

I had tinkered with the thought of buying corporate bonds direct but not sure how.
Presumably they could be bought via on line accounts such as TDW/iii/HL??

Again,i need to gen up on the whole terminology i,e coupon etc etc..

How much tax do you pay on returns from corporate bonds and are returns paid annually?

xrjtg

C_Mababejive wrote: »

Thanks all...so if i buy into a fund which has only investment grade bonds and interest rates go up,then the price of the bond,or unit price,will fall to achieve the same return?? so in the end,the return is evened out?

I think you might understand this now, but I'm not sure what you mean by "evened out". If interest rates rise then your existing bonds are worth less on the open market because they become less attractive to other investors who can find higher yielding alternatives elsewhere. The bonds are still worth their nominal value if held to maturity though, and still pay the same coupon, so you're not any worse off than you would have been if nothing had changed—you just haven't captured any of the increase in interest rates.

Aegis

C_Mababejive wrote: »

I think im already a bit over exposed in equities.

I had tinkered with the thought of buying corporate bonds direct but not sure how.
Presumably they could be bought via on line accounts such as TDW/iii/HL??

Again,i need to gen up on the whole terminology i,e coupon etc etc..

How much tax do you pay on returns from corporate bonds and are returns paid annually?

Generally fixed interest securities pay interest twice a year. It's treated as savings income, so usually it's taxed at 20% at source with non-taxpayers able to reclaim and higher rate taxpayers owing more through their usual assessment method. A fund will be slightly different in terms of timing, as they will usually hold a lot of different bonds and may therefore choose to pay interest quarterly or even monthly.