Corporate bonds and gilts Introducing gilts and corporate bonds
If you want a better return than you can get on your cash savings, you will need to accept greater risk. To get the rewards that investing your money can offer, you have to be prepared to accept the risk of loss.
Fixed interest investments are generally considered the next step up from cash and tend to be less risky than shares. Here, we explain what fixed interest investments are, what kind of returns they might offer you, the risks you might encounter, how to invest and what role fixed interest might play in your investment portfolio.
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What are gilts, government bonds and corporate bonds?
Investing in gilts, government bonds and corporate bonds effectively means lending money to different bodies, be it companies or governments, which pay you a regular income in the form of interest for a set period of time, after which your loan must be repaid.
They are designed to pay you a steady income and they tend not to offer opportunities for capital growth - at least, not in normal economic times. The most common forms of fixed interest investment are:
- Gilts and index-linked gilts
- Other government bonds
- Corporate bonds
- Permanent interest bearing shares (Pibs) and perpetual subordinated bonds (PSBs)
These fixed interest securities are issued by the British government when it wants to raise money. Gilts are generally considered to be very low risk investments because it is highly unlikely that the British government would go bankrupt and therefore be unable to pay the interest due or repay the loan in full.
Index linked gilts pay interest linked to the Retail Price Index (RPI) so their value rises with inflation.
Other government bonds
Government bonds are also issued by governments around the world to raise money. As the eurozone crisis demonstrated, some governments prove safer bets than others, as anyone owning Greek government bonds before the crisis will have found out.
Corporate bonds are issued by companies that are looking to raise capital. They are seen as riskier than gilts, as companies are generally considered to be more likely to default on debt than stable governments. Corporate bonds tend to offer a higher rate of interest to reflect this extra risk.
Permanent interest bearing shares (Pibs)
Pibs are like corporate bonds, but mainly issued by building societies. Perpetual subordinated bonds are issued by building societies that have demutualised.
Find out more: How gilts and corporate bonds work - a closer look
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