Bonds
Whilst bonds can earn handsome rewards, they often don't offer the level of security inherent in savings accounts. For example, your initial investment may or may not be guaranteed - and returns on your investment may either be fixed or linked to current stock market performance.
If you're a non-taxpayer, you may find bonds inappropriate for your needs, because they deduct tax from any returns which is non reclaimable.
Guaranteed Income Bonds
This can provide either growth or income.
Gilts
When you invest in Gilts, you're effectively lending the Government money, in return for which they pay you a fixed income - generally twice yearly. Gilts offer considerable security of returns, especially since these returns are backed by the Government. With Gilts, you will always know exactly the amount of income and return you will receive if you hold on to the Gilt for its full term (5, 10 or 15 years). However, the underlying value of the capital can fluctuate.
Corporate Bonds
These work in a similar way to Gilts, the difference being that they are issued by companies, rather than the Government. They work as if they were IOUs that pay you an income in return for you lending them your money. Generally, they pay a higher income than Gilts because there is more risk involved. Often held as funds within ISA's/UT or Investment Bonds
With Profits Bonds
With Profits Bonds are usually offered by insurance companies, with money invested in the insurance company's own With Profits fund. This, in turn, will invest in shares, fixed interest stocks, gilts (government bonds) and property. The main benefit of With Profits Bonds is that volatile investment returns are smoothed out by reducing Stock Market fluctuations. Bonuses are added to the funds every year.
Investment/Equity Bonds
These are usually open ended investment bonds, where you can choose a wide range of investment funds with different levels of risk to match your attitude to risk. Can be very advantageous for higher rate tax payer.
Growth Bonds
This provides capital growth, whilst providing protection for the capital guaranteed. They run for a fixed period of time, usually 1,3 or 5 years.
2 main types of guaranteed bonds
- Guaranteed growth bonds
These provide a fixed rate of interest over the life of the bond.
- Guaranteed capital bonds
This protects the capital invested, whilst providing a return which is determined by a separate index. e.g FTSE 100
Income bonds
This can provide either growth or income.