Beginners' guide to Investments

Types of investment - continued

Bonds or fixed-interest and index-linked securities

Bonds are loans made to, for example, governments or companies who are then expected to pay interest at a fixed rate over a set period of time, with the loan due back at the end of the period. These are a direct investment, and they usually have a fixed term.

Types of Bonds:

Government Bonds (such as UK 'gilts') - these are issued to raise funds for, for example, infrastructure investment.

 

Corporate Bonds - these are issued by companies to raise funds for activities such as expansion or research and development. These carry a higher level of risk than a cash bank account, as there is no guarantee the company will make the interest payments or pay back the original investment.

You can invest in a spread of government and corporate bonds through a bond fund. Investing this way lowers the risk. If one bond fails to meet its payments you only have a small percentage of your fund invested in it rather than possibly all your money.

In general bonds are lower risk than equities, although the risk from investing in bonds depends on which specific bond you invest in. If a bond is not index-linked, there is a risk that inflation will erode the real value of your money