Bonds can be an effective way for governments and large institutions to raise money – and are commonly used by investors and households to save money.
When companies are looking to raise bonds, otherwise known as corporate bonds, they can essentially pitch a figure and then offer investors a return on investment, which can range from 1% to 12% per annum and paid either monthly, every 6 months or annually. In fact, Hotel Chocolate used bonds to raise £6.4 million.
Fixed rate bond example
- You invest £10,000 into government bonds
- The bond term is 3 years
- The yield is 3%
- At the end of years 1,2 and 3, you receive 3% in interest repayments
- Once the bond expires, you will receive your original £10,000 back in full
- You would have made £900 (£300 per year) in total over the course of the bond.
Are fixed rate bonds a good investment?
Yes, they can be, and if you are investing in a stable government, it can be a very safe way to get a comfortable fixed return, which can last for 1 to 100 years.
Fixed rate bonds can be an effective way to diversify an investment portfolio, both for individuals and companies, and offer some tax efficient savings too.
The balance is finding a good paying fixed rate bond, since the most secure ones offer very low rates and taking on extra risk, can mean you earn up to 12% or nothing at all.
How much do you need to deposit?
Based on these fixed bonds examples, you can invest as little as £1, however the returns will be very lower.
Some other bonds have a minimum requirement such as investing £900.
At a corporate level, the minimums run in the thousands or even millions.
What to look at when comparing bonds
- Duration of the bond
- Minimum deposit
- Product you are investing in
- Potential return
- How often you are paid interest
Where can you buy bonds?
For UK government bonds, you can buy these directly from the government’s online platform, known as gilts or the gilt market. Here, you can choose the length of the bond agreement.
Some banks allow you to buy bonds directly from them, although it is likely that you will need to have an account with them or you can always go through a broker.
There are a number of online brokers specialising in fixed rate bonds and you can typically deposit money and start investing immediately. You will be able to log in and see how your product is progressing and how much you are saving.
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