The value of investments can fall as well as rise. You may get back less than you invested.
When you buy a gilt or bond, what you’re essentially doing – is buying an IOU. You’re agreeing to lend a set amount of money (whatever the bond or gilt value) for a fixed period of time and you’ll receive a fixed interest rate for that period. Typically, bonds are issued by companies who are looking to raise funds for their business, whist Gilts are bonds that are issued by the UK Government.
The interest rate offered on a bond when it is first issued will depend upon a number of factors but a significant influencer is the amount of risk associated with lending the money in the first place. UK Government bonds (Gilts) for example, are considered the lowest risk and therefore the interest rate will be pretty low – but it’s highly unlikely the Government will default on it, so for someone that’s just happy to see a guaranteed return, this could be a good option. The riskier the investment, the higher the offered interest rate and whilst that might be very tempting – you’ve got to take into account that you might never get your money back at all… if the company goes bankrupt for example.
Bonds are usually sold at £100 each and the end date of a bond is called its maturity rate. If you still own the bond when it matures, you’ll get back your original investment amount (£100 per bond). Don’t forget, you’ll have been paid interest for your investment in the interim which makes bonds a useful investment if you buy enough of them and want to live off the regular interest payments before retrieving your lump sum at the end to put into another investment elsewhere.
It is possible however, to sell your bond before it reaches maturity and you could get a pretty good price on it depending on the conditions. The resale value will depend on the amount of time the bond has left until maturity (as this is where the buyer is going to make their money) and also other influencing factors such as interest rates, inflation and exchange rates.
Let’s imagine for example, you buy your bond with an agreed rate of 4% interest at a time when the Bank of England’s interest rates are just 0.5%. This seems like a pretty good investment. But what happens if, over time – the Bank of England raises its interest rates to 4%. All of a sudden, your money would be better off in a savings account and the resale value of your bond will be very low.
Having said that, in general corporate bonds and gilts are generally good for those looking for a low risk, stable portfolio – but to understand your options fully and find the best investment approach for you, you’ll need to speak to an Independent Financial Adviser.
Here at Credius we’ve got a great wealth of experience with a financial adviser in London, ready to help you make the most suitable investment choices so why not call us today on 020 7562 5858 or email us at firstname.lastname@example.org. We’d love to hear from you.