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Investment Bonds Explained in Simple Terms

With investment bonds explained you can decide it they are a way for you to put money aside for the future. When you have some money to invest, you want to be sure that your initial investment is as safe as possible. The purchase of bonds is generally considered the safest way.

What Are Bonds?

In the very simplest terms, a bond is an ‘IOU’ issued by a government organisation or company (the issuer). They sell you a bond and promise to give you back your money, plus interest, after a certain period of time (redemption date). The amount of interest is usually predetermined. This is unlike saving accounts where the interest rate normally fluctuates. When the redemption date arrives, you can choose to hold onto the bonds to collect more interest, or cash them in.

Bonds can be purchased at banks, insurance companies, investment firms, and brokerages. The cost depends on the bond, but most start at £100, plus any brokerage fees.

Types of Bonds

Gilts are bonds issued by the government in the UK. They are used to finance spending on public interests. They are rated AAA, which is the highest possible, and are considered to be virtually risk free.

  • Conventional Gilts are normally paid interest twice a year and have a set maturity date. Some Gilts have a feature labelled “calls,” which allow the government to pay the debt ahead of time.
  • Gilts linked to Index are those that the rate of return (interest) is linked to the UK Retail Prices Index rather than a fixed rate. After maturity, it would be up to the investor to choose the best time to cash in the bond.
  • Premium Bonds currently earn a rate of 1.5%. What make these different is that the bonds are also entered into a monthly random drawing with a maximum prize of £1 million.

Other Types of Bonds

There are several other types of bonds with more complicated schemes, pay out dates, and some with variable interest. But, having the primary type of investment bonds explained should give you a better understanding over all.

 

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