A bond is a security type representing a loan to the issuer. Bonds are tradable and are used by investors to generate income through interest payments and capital gains. The UK bond market is seen as one of the most significant globally, with over £2 trillion worth of outstanding bonds.
Secondary markets exist for bonds, allowing them to be bought and sold, allowing investors to sell their holdings before maturity if they need to raise cash. The secondary market for UK government bonds is very liquid, with a wide range of prices available.
Bonds are a popular investment for retirees, as they provide a regular income stream and are relatively low-risk. You can also use bonds to hedge against inflation, as the interest payments are usually higher than the inflation rate.
You can invest in numerous bonds through Saxo.
Types of bonds in the UK
Government bonds
The UK government is the largest issuer of bonds, with over £2 trillion worth of outstanding debt. The yield on UK government bonds has been falling in recent years as investors have sought safety in government debt. It has pushed down the cost of borrowing for the government, making it easier to finance its budget deficit.
UK government bonds are one of the most secure investments available, as they are backed by the complete trust and credit of the British government. The interest payments on UK government bonds are also exempt from taxes, making them attractive to retirees.
Corporate bonds
Companies issue corporate bonds. A company will use the proceeds of a bond issue to finance its operations or to refinance existing debt. Corporate bonds are riskier than government bonds, as there is a higher chance that the company will go bankrupt and not repay its debts.
However, corporate bonds can offer investors higher yields than government bonds because they are riskier. Corporate bonds can be bought and sold on the secondary market and usually have lower liquidity than government bonds.
Bank bonds
Bonds issued by banks are known as bank bonds. A bank will use the proceeds of a bond issue to finance its lending operations. Bank bonds are considered riskier than government bonds, as there is a higher chance that the bank will go bankrupt and not repay its debts.
Bank bonds can be bought and sold on the secondary market, but they usually have lower liquidity than government bonds.
Municipal bonds
Municipal bonds finance public work projects like schools and hospitals. Municipal bonds are considered safe investments, as the municipality has strong financial backing. The interest payments on municipal bonds are exempt from taxes, making them attractive to investors.
Municipal bonds can be bought and sold on the secondary market and usually have higher liquidity than corporate bonds.
Junk bonds
Junk bonds are bonds that companies issue with a poor credit rating. Junk bonds are considered riskier than corporate bonds, as there is a higher chance that the company will go bankrupt and not repay its debts.
Junk bonds can be bought and sold on the secondary market, but they usually have lower liquidity than corporate bonds.
Why should you invest in a bond in the UK?
Bonds offer a regular income stream
The greatest benefit of investing in a bond is receiving a regular income stream. It can be helpful if you are retired and rely on the income from your investments to support yourself.
Bonds are considered to be safe investments
Bonds are one of the most guarded investments available. It is because they are backed by the full faith and credit of the British government or the municipality issuing the bond. The interest payments on UK government bonds are also exempt from taxes, making them attractive to retirees.
Bonds offer a predictable return
When you invest in bonds, you know what you will receive at maturity. It can be helpful if you are looking for a stable investment that will give you a predictable return.
