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| With a Direct Trader Share Dealing account, you can invest in more than 200 investment-grade bonds. These include all UK government bonds (or gilts), bonds issued by the European Investment Bank (EIB) and Corporate bonds issued by individual companies. |
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A bond is a loan. An investor lends money in return for a series of interest payments and, usually, agrees a fixed date for the loan to be repaid.
A bond is different from other loans because it can be traded. Investors can buy and sell bonds without having to refer to the original borrower. The holder receives interest over the entire life of the bond, which is known as the coupon. The borrower also makes a promise to repay the loan (the principal) on the maturity date.
Why buy bonds?
Investors often consider bonds when there is uncertainty in the stock market. Bonds can offer secure income and capital return.
Bonds have fixed-income returns, as well as the possibility of some capital growth. They are slightly less volatile than shares and provide a more secure income return than cash. Bonds are often used in broad-based portfolios to complement shares.
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There are many different types of bond, including:
Government bonds
UK government bonds are known as 'gilt-edged' bonds. They are sometimes regarded as the safest bond investments because they are backed by the UK government.
Supranational bonds
These are bonds issued by institutions such as the European Investment Bank (EIB) and the World Bank. Like government bonds, they are regarded as the safest bond investments and have a high credit rating.
Corporate bonds
Corporate bonds are usually the riskiest type of bond to invest in. Companies are far more susceptible to economic problems, mismanagement and competition than governments. But corporate bonds can also be the most lucrative fixed-income investment, since you are rewarded for the extra risk you are taking. The lower the company's credit quality, the higher the interest you receive.
Zero coupon bonds
These don't pay periodic interest like normal bonds. Investors buy them because they don't attract income tax although they are liable to the same capital gains tax when they are sold.
Index-linked bonds
The coupon and capital redemption of this type of bond are linked to the rate of inflation. Index-linked bonds are more popular in times of high inflation.
Convertible bonds
These bonds can be exchanged for shares or other securities, usually of the same company.
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