Guilts and Bonds

The_Fiddler_2

What exactly are guilts and bonds and which ones are the best ones to invest in?

bowlhead99

Gilts are bonds issued by the UK (or other) governments to fund its debt. Gilts are normally redeemed at face value between specified dates, which may be 5, 10, or even 40/50 years away. They are called gilts because in the old days, loans to the government would be secured with the government's real gold, and became known as 'gilt edged'.

The interest rates are generally low compared to other types of investments, as they are about the most 'risk free' investment you can make. Because the bonds have a fixed interest rate and a fixed date to cash them in, while interest rates in the market are fluctuating all the time, the actual market value of the bond an investor holds will go up and down from time to time. If a bond is going to pay out at £105 in a year, and interest rates are 5% the bond would probably cost you £100 to buy. But if prevailing interest rates in the market suddenly increase, your bond will fall in value - why would anyone pay £100 to get £105 in a years time when they can get 10% in the market. You don't actually have to hold a bond until it matures, as they are tradable. So basically gilts are tradeable debt instruments issued by governments, very low risk.

A bit riskier would be other types of bonds issued by companies - same concept but issued by companies, i.e. corporate bonds. These can have a whole range of risk/reward because some companies have worse credit ratings than others. If HSBC issued a bond redeemable in, say 2009 they could do it with a relatively low interest rate because, like investing with the government, it's unlikely their 100 billion pounds company is going to go bust in next couple of years and be unable to pay you (they have to pay out their bondholders before shareholders get anything). Whereas, if General Motors issued a bond they would give you a better rate on it, because although they are a massive company they have not made decent profits for years, so their credit rating is unlikely to be very high.

The riskier the company the more interest you will get compared to the price you pay for its bonds. High yielding bonds are sometimes called junk bonds because depending on the fortunes of the company, they may not be worth the paper they're printed on. But fundamentally investing in a bond, with a known interest rate, is much safer than investing in a company's ordinary shares. If the company halves in value it has to pay out its debts/bonds and there may be nothing left for shareholders. Of course if the company doubles in value it only has to pay out the fixed known amounts to its debt holders, and the shareholders get all the rest, so bigger returns are possible with shares.

The easiest way to get involved in 'safe' bond-type stuff if you are a novice investor is to
a) buy national savings bonds issued by NS&I that suit your time horizon
b) invest in a fund that invests some or all of its assets in bonds

Of course you could buy gilts or corporate bonds yourself, but as to which ones to buy, it would depend on what type of risk/return you wanted, I'm not an advisor anyway, and even if I were I probably couldn't give you 'advice' on these boards.

The_Fiddler_2

Thanks for your post

dunstonh

One thing to note is that the name "bond" is one of the most misused names in financial services. It has become a marketing name for many products which are not bonds. So, you need to be careful not to mix up your corporate bond, investment bond, fixed interest bond or james bond.

I'm not an advisor anyway, and even if I were I probably couldn't give you 'advice' on these boards.

You are quite correct. Advice on regulated financial services products is near impossible on the forums due to disclosure and compliance reasons. Also, there is never enough information to give good advice. That is why responses, particularly from those authorised to give advice, tends to be more discussion based or gives you pointers to help you research it for yourself.

And for those that think its being over careful, there has been an occasion where someone printed posts on a thread and sent them to the FSA in a form of a complaint. It was thrown out as it was selective copy and pasting and individual was treated as being a trouble maker and the thread in its entirety contained nothing wrong as it was discussion only.

The_Fiddler_2

dunstonh wrote: »

You are quite correct. Advice on regulated financial services products is near impossible on the forums due to disclosure and compliance reasons. Also, there is never enough information to give good advice. That is why responses, particularly from those authorised to give advice, tends to be more discussion based or gives you pointers to help you research it for yourself.

And for those that think its being over careful, there has been an occasion where someone printed posts on a thread and sent them to the FSA in a form of a complaint. It was thrown out as it was selective copy and pasting and individual was treated as being a trouble maker and the thread in its entirety contained nothing wrong as it was discussion only.

I am only looking for general advice - no offence but I wouldn't take any advice from an internet board without doing my own research anyway

I will try to make my future questions more general in nature

Thanks for your response.