How do Bonds/Corporate Bonds work

soulman247

1) How much intrest can you get from a Bond/Corporate Bonds?

2) What's the best Bonds/Corporate Bonds

3) AND HOW DO THEY WORK

4) Were can you buy them

5) What does this mean Currently paying a distribution yield of 3.8% and an underlying yield of 3.5% ***

Linton

soulman247 wrote: »

1) How much intrest can you get from a Bond/Corporate Bonds?

2) What's the best Bonds/Corporate Bonds

3) AND HOW DO THEY WORK

4) Were can you buy them

5) What does this mean Currently paying a distribution yield of 3.8% and an underlying yield of 3.5% ***

1) Typically 5-10%

2) Define "best". Generally speaking the higher the interest rate the higher the chance of the company going bust and you losing all your investment.

3) A Bond is a loan to the issuing company/government. They pay you interest on a regular basis.

So a company may issue you a bond of £100 (the normal initial value) paying 6% interest - £6 annually. Once issued the bond can of course be sold on. But say the company's prospects look bad so you may only be able to get £90 for it. So now this bond is still paying £6 but worth £90 - an interest rate of 6.666%.

Also, if general interest rates rise - say the government is prepared to pay 6%, then bonds that pay 6% will decrease in value, so providing higher interest rates, as most governments are safer than most companies.

Bonds generally have a maturity date at which point the original value, say £100, is returned. So bond prices approach the face value as the maturity date is reached.

Of course if the issuing company (or government) goes bust the bond becomes worthless, though not as worthless as the shares - bondholders are paid any money remaining before shareholders.

A bond becoming close to worthless pays a very high rate of interest. This is known as a "junk bond".

4) Small investors do not often deal in bonds as they are complex. For example, any one company may have issued different bonds paying different interest rates with different maturity dates. Add in the maturity date, and comparative valuation becomes tricky. However some of the online stockbrokers do allow the buying and selling of bonds just like shares - iii for example. Also some companies have issued bonds intended for the small investor - Tesco with its RPI matching bond is one.

The most common way of investing in bonds is to buy a managed fund which will hold a large number of different bonds and so spread the risk. There is a range of such funds which invest in bonds of different risk - the higher the return the higher the risk.

5) The distribution yield is simply the income as a percentage of the current price. So in my example the distribution yield of the 6% bond would be 6.6666%.

The underlying yield takes into account the return of the face value at maturity. So in my example if the bond was just one year from maturity you would get £6 interest and £10 profit in the year giving an underlying yield of (6+10)/90 * 100 = 18%. Note - this is most unlikely to happen in practice for obvious reasons.

oldtoolie

Here's a site with more info:

http://www.fixedincomeinvestor.co.uk/x/learnaboutbonds.html?id=49