Learn about Bonds

  Books about bonds

Q:I am used to trading equities. Can privat investors trade bonds? A: Yes, but the nature of the instruments makes them better suited to a "buy & hold" strategy.

Q: Do I need a lot of money to trade bonds? A: If you invest in comparitively small sums, the return may be diminished by dealing costs. Investments of below £1,000 are unlikely to be viable. Also, some bonds have minimum denominations. This is traditionaly £1,000, although increasngly bonds are being issued with £50,000 minimums - an unwelcome development.

Q: I own various bonds in my portfolio, why are they not shown on this website?   A: There are thousands of Sterling denominated bonds. Not all of them are liquid and we are unable to display accurate price data for all of them. The bonds displayed are provided by Canaccord Genuity, based on considerations of quality and liquidity. To deal in bonds not shown on this list, please contact your broker.  

Q: Are credit ratings displayed on the website? A: At present, credit ratings are not displayed on the website, however coverage and opinion of the credit quality of individual issues is featured in "Bond of the Week".  For more about credit ratings see "Credit Ratings Explained".

Q: where can I look up credit ratings? A: Private investors can look up the rating of most bond issuers onhttp://www.moodys.com/ and http://www.standardandpoors.com/. Also Fitch IBCA (www.fitchratings.com).

Q: Can I put bonds in my ISA account? A: Inland Revenue rules state that in order to be eligible for holding within an ISA, a bond must fulfill the following criteria: Firstly the bond must have a life of five years or more at the time of purchase (without a holder's option for early redemption). Secondly, the bond should be listed on a recognised stock exchange, or the bonds must be issued by a company which is itself listed (or a major subsidiary thereof).

Q: Can I put bonds in my SIPP? A: Yes, the majority of SIPP schemes allow you to hold bonds. There is no theoretical barrier, however the bond must be listed (note; all the bonds in our "universe" are). 

Q: I have heard that equities provide a better return than bonds. Is this true?  A: Yes, over the longer term, equities have typically outperformed bonds. However, there will be periods of time when bonds outperform equities (such as 2000-2003).  

Q: If I sell bonds my bonds before the coupon pays out, will I miss out on the interest?  A: No, you will receive a pro-rata payment known as the "accrued interest". Conversely, if you buy a bond half way through its coupon period, you will have to compensate the previous holder. This way, the "clean" trade price of the bond is kept separate from the gradual roll-up of interest.  

Q: What about income taxA: Income from bonds is paid gross, but is taxable and thus should be recorded on your tax return. If you hold bonds in an ISA or a SIPP, you will be able to benefit from tax free income.  

Q: And capital gains tax? A: All Gilts are free from GCT. The majority of Sterling bonds are free from capital gains tax, providing that they are "Qualifying Corporate Bonds". Broadly speaking this means most bonds apart from convertibles, however it is best to check if any individual issue is disqualified from this. Note, caution should also be used with low or zero coupon bonds, where the capital gain may be viewed as income.

Q: And stamp duty? The situation is confused. No for gilts and no for investors holding bonds via the Euroclear system. In some cases. HMRC charges "stamp duty resreve tax" on bonds delivered via the Crest system.

Q: Does the Fixed Income Investor model portfolio use real money? A: Yes; we track the performance of a £100,000 portfolio, started in January 2007.

QWhat does subordinated mean? A subordinated bond is an issue which carries less seniority in the "pecking order" of the company's balance sheet. When times are good, this will make little difference, but in the event of the issuer hitting hard times, the coupon payment  on certain classes of subordinated debt may be waived (see below). Also, if the issuing company is forced into liquidation, subordinated debtholders will only be paid out once senior debt has been repaid ( note: sub holders will, however, rank ahead of equity holders). The ranking is as follows (with guidelines of typical features):

  • Senior Debt: this is the best
  • Lower Tier 2: No coupon deferral. The next best after senior debt.
  • Upper Tier 2: Coupon deferral, but cumulative.
  • Tier 1: Coupon  deferral, non cumulative.
  • Preference Share. Generally, coupon payment can be waived, non-cummulative.

Q: Is the yield shown anualised, or to the redemption date? The yield shown is annualised. This means that a 6 month bond showing a yield of 10% will provide a total return of 5%. Likewise, a 10% bond with two years to run will provide a total return of 20%.

Q: When are the coupons paid? Coupons are paid on the anniversary of the redemption date. The majority of non-gilt sterling bonds pay annually. Gilts pay semi-annually (apart from War Loan, which pays quarterly) 

Q: Where can I find out the full details of a bond so that I can check its level of security, such as priority ranking, restrictions etc? The full details of a bond are available on the prospectus. We have loaded many of these onto the website and continue to add to this library as time goes on.  Also, these documents can normally be obtained from the IR dept (and often the website) of the issuing company. Alternatively, contact your broker, who should be able to download a copy for you.

Q: What's for lunch? This is the most frequently asked question in our office.

Got a question? Drop me a line at analysis@fixedincomeinvestor.co.uk.

The content on this section of the website is provided for educational purposes. Examples shown of prices, yields and credit ratings may have changed since the time of publication.

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