Investment bonds have proven to be a hit amid the financial crisis, after the Bank of England cut its base rate to 0.5% – the lowest on record, forcing banks to reduce the amount of interest paid on regular savings accounts.
Investment bonds can vary significantly, but the general rule around them is that in exchange for some kind of risk, they provide the potential to earn higher returns that those offered on standard savings accounts, as your investment is not generally tied to fixed interest rates, but on the success of the area you invest in.
There are different types of investment bonds, including:
* corporate bonds – issued by companies
* gilts – issued by the UK government
* bond funds – grouped investments investing in a range of bonds
Corporate bonds are often issued by companies as a method of raising capital that can be invested into their business. The amount invested, with interest added is returned to the investor on an agreed date. Corporate bonds can be purchased and sold on the stock market and their value can increase or decrease.
Gilts (government bonds)
Gilts (or gilt-edged stocks) are bonds issued by the government paying investors a fixed interest rate. They are considered a safe bet, as it is highly unlikely that the government will go bust.
However, as gilts are also bought and sold on the stock market where their value can fluctuate.
Bond funds invest your money into several different bonds which can include corporate bonds and gilts, each offering a different interest rate and maturity dates.
All companies have different credit ratings and those with higher credit rating are considered safer than those with a low credit rating, so the latter would have to offer higher rates in order to attract investors and compensate for the increased risk.
In June, the Investment Management Association (IMA) revealed that investment ISA net sales hit £247m, marking the highest quarterly ISA sales recorded in six years.
Investment ISAs allow you to use your ISA allowance as an investment to avoid having to pay any taxes on your earnings. In April 2010, the ISA allowance will increase to £10,200 (in October 2009 for anyone aged over 50), which means that you could invest this amount every year and receive 100% of your earnings. This technique has proven to be extremely successful for some investors, with many people earning over a million pounds simply through making good use of their ISA allowance.
For more information on investment ISAs and to see a detailed list of investment options, see our Investment Bonds page.