What Are Bonds?

Bonds are a way for individuals to lend money directly to businesses. They are, in effect, debt instruments or company IOUs. Bonds will typically have terms of 3-5 years. Investors earn a fixed interest coupon for the duration of the bond and then get their initial capital back upon conclusion of the term..

For example:
Invest made = £10,000
Bond Term = 3 Years
Interest rate = 8% per annum
Receive:  £800 (Gross before taxation) of interest each year for the next 3 years
Total Gross Rate of Return:  £2,400
On maturity of the Bond:  Initial investment capital of £10,000 returned

Examples of bonds

In recent years businesses as diverse as John Lewis, River Cottage and Hotel Chocolat have issued bonds as a way of securing debt finance. Some companies offer vouchers and credits as part of their investment return: for example, the Mexican restaurant chain Chilango offered burrito vouchers to its investors and Naked Wines offered its investors wine credits.


Popularity of bonds

Research from Capita Registrars suggeststhat the market for bonds could rise to £8bn by the end of 2017. Their increasing popularity is partly a result of the credit crunch: banks are less willing to lend, so companies have had to look for alternative fundraising mechanisms. Similarly, low interest rates have meant that savers are looking for investment opportunities to secure a reasonable return on their savings.


Are Bonds Risky? 

No investment is free of risk and bonds are no different. As non-readily realisable securities, unlisted bonds are not as flexible as corporate bonds in that they cannot be traded or converted and are not listed on any market. They must be held until they mature and cannot be cashed in early.

Also, the Financial Services Compensation Scheme does not apply to bonds.

Whilst the risk profile of bonds is higher if they are unlisted, such bonds usually offer a substantially higher rate of return than listed bonds and this offsets the comparative lack of security and flexibility.

To further offset the risk to investors in unlisted bonds, the Financial Conduct Authority has introduced certain safeguards including the restriction that novice investors can only invest 10% of their readily investable assets.