Before you readCapital at risk. The value of investments and any income from them can fall as well as rise, and you may get back less than you invest. This is information, not advice.
In one paragraphA bond is a loan. You lend money to a government or a company. It pays you interest while it has your money, and it promises to repay the loan on a set date. You can also sell the loan to someone else before that date, which is why a bond is sometimes called an IOU you can trade.
When you buy a bond, you are lending money. The borrower might be the UK government or a company. In return it agrees to pay you a fixed amount of interest at set times, and to repay the loan on a set date. The borrower is called the issuer, the interest is called the coupon, and the repayment date is called maturity.
That is the whole idea. Everything else in this guide is detail: who is borrowing, how much they pay, how the price moves, and what happens if something changes before the loan is repaid.
What does a bond look like in practice?
Here is the example used in every chapter. It is deliberately simple, and it is an illustration, not a forecast.
| You lend | £1,000 |
|---|---|
| For | 5 years |
| Interest at 5%, paid each year | £50 |
| Interest over five years | £250 |
| Your loan repaid at the end | £1,000 |
| Paid to you in total | £1,250 |
That total arrives only if the borrower keeps every promise. Chapter IV explains what happens when a borrower cannot pay.
Follow your £1,000
You hold £1,000 in cash. Nothing has happened yet.
Why is a bond called an IOU you can sell?
Because you do not have to wait for the end. A bond is a written promise to pay, and that promise can be sold to another investor at any time before maturity. Whoever holds the bond on the day a payment is due receives it.
This is what makes a bond different from a fixed-term savings account. You can get your money out early by selling. The catch is the price. Nobody is obliged to pay you exactly £1,000 for your bond. They will pay what it is worth to them on that day, and that can be more or less than you paid. Chapter V explains why.
How is a bond different from a savings account?
A savings account pays interest, and the balance does not go down. Money held with a UK bank is also usually protected by the Financial Services Compensation Scheme, up to a limit, if the bank fails.
A bond works differently in three ways. The interest is usually fixed for the whole loan, so it does not move with savings rates. The price can go up and down if you sell before the end. And if the borrower cannot pay, the loss is yours: a bond is a promise, not a certainty.
How is a bond different from a share?
A share makes you part owner of a company. If the company does well, the share may rise, and the company may pay a dividend. It does not have to.
A bond makes you a lender, not an owner. The interest is a legal obligation, not a choice, and it does not grow if the company does well. If a company fails, its lenders are paid before its shareholders, so bondholders may get some of their money back when shareholders get nothing.
Why do people hold bonds?
- A known income. The interest is set out in advance.
- A known end date. A single bond repays on a set day, if the borrower keeps its promise.
- A different kind of risk. Historically, bond prices have generally moved less than share prices, although their value can still rise and fall. Many people hold some of each so that not everything moves together.
The most common bond a UK reader meets is a loan to the government, called a gilt. Chapter III covers gilts in depth.
None of these makes a bond right for everyone. The next chapter looks at who else is lending, and why that matters to you even if you never buy a bond.