None of the information provided is investment or tax advice.
You should always read the associated risks before deciding whether to invest. These can be found on the product pages as well as in our risks overview.
Please confirm you have read the information above.

Confirm

Welcome to Downing LLP

Other
plus icon
document search icon 3
24/10/2024
10
min read

A guide to bonds

No items found.

What’s a Rich Text element?

The rich text element allows you to create and format headings, paragraphs, blockquotes, images, and video all in one place instead of having to add and format them individually. Just double-click and easily create content.

Static and dynamic content editing

A rich text element can be used with static or dynamic content. For static content, just drop it into any page and begin editing. For dynamic content, add a rich text field to any collection and then connect a rich text element to that field in the settings panel. Voila!

asdasd

How to customize formatting for each rich text

Headings, paragraphs, blockquotes, figures, images, and figure captions can all be styled after a class is added to the rich text element using the "When inside of" nested selector system.

http://ww.w.goooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooooogole.comdadsdasdas

  • asd
  • asd
  1. asdasd
  2. asd
  1. asd

asdasd

Do you know your government bonds from your premium bonds? Or how bonds compare to other asset classes?

At Downing, we provide solutions that match your investment challenges. Our bond platform provides an opportunity to invest in asset-backed unlisted corporate bonds in sectors such as healthcare, hospitality, wholesale finance and property.  

We understand that it can be hard to navigate the many types of bonds available so we put together a quick guide.

What are bonds?

Bonds are a type of investment that represent a loan from an investor to a borrower, much like an ‘I owe you’. When you purchase a bond, you (the bondholder) are lending money to the bond issuer (borrower) in exchange for regular interest payments, also known as coupons. This is with an understanding that the initial invested amount (face value of the bond) will be repaid to you when the bond reaches maturity, which is at the end of the agreed term. The return that you receive from the bond (the initial investment amount plus the interest earned) is referred to as the yield. Bond issuers may include banks, private companies, or governments, seeking funds for various purposes such as expansion activities or to fund development projects.

Case study:

Elizabeth

Alice purchases a bond for £10,000 with a 5-year maturity with 5% annual interest payments

Alice will receive an annual interest payment of £500 each year (which totals £2,500) and, when the bond reaches maturity, she will get back the initial £10,000 she invested. This is assuming there have been no defaults.

Please note that the returns displayed above are for illustrative purposes only, capital is at risk and interest payments are not guaranteed.

How do bonds compare to other asset classes?
The other main traditional asset class is equities, which you might know as stocks and shares. If you purchase shares in a company, you are buying a portion of the ownership of that company and the value of your shares will either increase or decrease based on company performance and other factors.

If you purchase bonds, you are providing debt and lending to that company rather than owning part of it. Unlike equities, bonds typically offer a fixed return for their duration and you receive your initial investment back at the end of the term. This is why bonds are known as 'fixed income' investments.
Types of bonds:

Government Bonds

Like their name suggests, these are bonds issued by the government of a country to raise funds for public spending, infrastructure projects, or managing budget deficits, amongst other things. In the UK, they are commonly known as gilts but go by different names in other countries, such as T-bills (treasury bills) in the US,Bunds in Germany, and OATs in France.

Gilts are known to be relatively safe investments because they are backed by the UK government, and typically offer fixed or variable interest payments, known as coupon payments. They are considered highly liquid as they can be traded on secondary markets. This also means that the value of the bond can go up as well as down as interest rates fluctuate, with any capital gain being exempt from tax. Some investors may experience a loss if they need to exit the Bond before the maturity date.

Premium Bonds

Unique to the United Kingdom and backed by the government, Premium Bonds are a type of savings product offered by National Savings and Investments (NS&I). Unlike traditional savings accounts that pay interest, Premium Bonds offer the chance to win tax-free prizes in a monthly prize draw.

Each £1 invested equates to one Premium Bond that will be entered into a monthly draw. There is a £25 minimum investment and a £50,000 maximum investment, and monies invested can be redeemed at any time. If you are looking for regular income or a product that keeps up with inflation, it is likely that this type of product is not for you.

Bond Exchange Traded Funds (ETFs)

Bond ETFs are investment funds traded on exchanges such as the London Stock Exchange (LSE). Unlike individual bonds, the investor is purchasing shares in a fund that invests in bonds.

They are usually made-up of a variety of bonds, including corporate bonds, government bonds and municipal bonds (issued by local councils) and so can provide investors with exposure to a diversified bond portfolio with just a single trade. Holding a number of bonds with varying maturity dates means that the Bond ETF receives regular coupon payments, which are passed onto investors in the form of monthly or six-monthly interest payments.

Unlike some of the other bonds we have mentioned in our guide, there is not a fixed repayment date, and investors can buy or sell shares in the Bond ETF at anytime. While they are generally less volatile than stocks and shares, they are subject to fluctuations in value due to interest rates, credit risk and market sentiment –factors to consider before making an investment decision.

Corporate Bonds

Corporate Bonds are debt-based securities issued by private and public companies. They fall broadly under two categories, listed and unlisted. There are various reasons why a company would issue a bond such as expansion, research and development, as well as refinancing existing debt.

The main difference between listed and unlisted corporate bonds, lies in their trading status and accessibility to investors. Listed bonds are traded on public exchanges or bond markets. Being listed on exchanges means they provide greater liquidity. This is not the same as with stocks and shares as investors are still loaning money to a business in return for interest, rather than purchasing a share of that business.

Unlisted corporate bonds are not traded on public exchanges and instead are sold privately, typically to institutional investors, such as pension funds, insurance companies, and asset managers. They can be an attractive option for companies looking to raise funds as they can provide more flexibility and lower administrative costs, compared to listed bonds.

What to consider before investing in bonds

The benefits of investing

Diversification
Investing in bonds, alongside other asset types, creates diversity in an investment portfolio. This helps to reduce the risk of a portfolio facing low returns.

Predictibility
If an investor is seeking greater certainty from their investments, bonds which provide regular interest payments are typically more predictable than income through, for example, stock dividends.

Security
Whether it's a government or company issuing it, bonds typically provide some level of security. It is important to research and understand what that security is before investing.

Choice
Investors have the choice of bonds with various maturities, short term, medium term and long term. Investors can therefore choose a term that is best suited to their needs.

The risk of investing
The risk of investing
Bonds can be sensitive to interest rate changes. If interest rates rise, the value of the bond can drop and investors may suffer a loss if they need to exit the bond early.
Credit risk
Credit risk occurs where the company who issued the bond is in financial difficulty and is unable to pay the investor their interest payments or repay their initial capital when the bond reaches maturity.
Inflation risk
The return an investor receives from a bond may be negatively affected by an increase in inflation, due to their fixed nature, inflation can erode the value of the bond.
Liquidity
Bonds may be more illiquid than other assets, and therefore can be difficult to sell. This means that they may be less attractive for investors who are seeking quick access to their funds.

An overview of Downing Bonds

Downing Bonds is a platform offering investors access to unlisted corporate bonds and enabling them to diversify their portfolios with those opportunities. The platform was established in 2016 to provide everyday investors access to investments historically inaccessible because of their entry requirements.

We benefit from Downing’s 35+ years of investment management experience. Our award-winning investment teams not only seek out attractive investment opportunities, but also work with those businesses to help reach their key objectives.

Downing Bonds focuses on lending to asset-backed businesses across diverse industries such as property development, care homes and hospitality. Investors can choose which industries to invest in and while seeking competitive returns they are also contributing directly to the sectors they are passionate about.

Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong. For personalised advice, consult with a financial adviser.

Download the guide
Learn more about Downing Bonds

Bond glossary

  • "Bondholder" The investor who purchases a bond and lends money to the bond issuer.
  • "Bond issuer" The entity, which can be a government, corporation, or other organisation, borrowing funds by issuing bonds.
  • "Capital gain" Profit earned on the sale of an asset which has increased in value over the holding period.
  • "Coupon payments" Interest payments made by the bond issuer to the bondholder, typically at fixed intervals until the bond matures.
  • "Credit" "Defaults" The ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in  the future.
  • "Diversification" Failure to make required interest or principle payments on a debt.
  • "Face value" The process of allocating capital in a way that reduces the exposure to any one particular asset or risk.
  • "Inflation" A change in the prices of goods and services in an economy  over time.
  • "Institutional investor" Organisations that invest large sums of money on behalf of others, such as pension funds, insurance companies, mutual funds, and hedge funds.
  • "Interest rate" The price paid to borrow money.
  • "Liquidity" The ease with which an investment can be bought or sold.
  • "Maturity" The date when the bond issuer repays the face value of the bond to the bondholder, marking the end of the bond term.
  • "Yield" Returns an investor expects to receive each year over its term  to maturity.

Risk warning

Important notice: This guide is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment or tax planning decision. This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.

Share
https://downing.co.uk/insights/a-guide-to-bonds

We're here to help

If you are a financial adviser, or discretionary fund manager call 020 7630 3319 or email us at sales@downing.co.uk

If you are a private investor call  020 7416 7780 or email customer@downing.co.uk