There are many different types of bonds so it might be useful to briefly summarise each in turn:
Corporate bonds
Corporate bonds are usually issued by large companies where the minimum investment threshold is set at a significant amount (£50,000 would be quite common). This type of bond is usually aimed at pension funds or other financial institutions. Although, retail investors can invest smaller amounts through a specialist fund.
Retail bonds
Like corporate bonds, retail bonds are typically issued by large, usually well-known companies (like Tesco Personal Finance or National Grid) and are aimed at retail investors where the minimum investment threshold is set a much lower amount (£1,000 is quite common).
Retail bonds are listed on the London Stock Exchange (through the ORB market) which means they can be bought and sold the in the same way as stocks and shares. They do not have to be held until maturity.
Gilts
Also known as gilt-edged securities. These are issued by the British government when it needs to raise money to fund its spending commitments. Although called gilts, this ‘product’ is effectively another type of bond; in that a sum of money is borrowed in return for a fixed rate of interest payable over a defined period of time.
Because the borrower, in this case, is the UK government, these bonds (gilts) are considered the safest form of investment. However, if the borrower was another, less stable government, (Greece for example, at the height of the Eurozone crisis, then there is significant risk of capital loss).
Index-linked gilts are gilts which pay an amount of interest that is linked to the Retail Prices Index (RPI), so their value rises with inflation.
Sovereign bonds
Sovereign bonds are effectively another name for gilts. When a national government needs to raise additional capital, to finance its public expenditure requirements, it can do so by increasing its tax revenues or by taking on more borrowing. Governments raise this new money by issuing Sovereign bonds (or gilts) in the capital markets.
To learn more about Sovereign bonds, please click here.
Mini-bonds
Mini-bonds are a relatively recent financial innovation relying on the same legal principles established for more conventional corporate bonds. A mini-bond describes a debt-based investment product where SMEs (small to medium enterprises) can raise money from hundreds of retail investors.
In return for investing their money, the mini-bond holders receive an agreed rate of interest over a fixed period of time. This also means that the investor has to hold the mini-bond until maturity i.e. cannot sell up until the term of the bond expires.
To learn more about mini-bonds, please click here.
Savings bonds
Unlike, all the other types of bonds mentioned above, a savings type of bond is NOT an investment product in the sense that your money is exposed to the risk of capital loss. It is cash placed on deposit with a bank or building society for a fixed period of time.
These would also include premium bonds issued by the Government through the National Savings and Investments scheme (NS&I).
What are bonds and how do they work?
If you would like to learn more about bonds and how they work, the please click here.
