09:18 24 July 2013
UK savers who are hoping to cash in on the yields from their investment on fixed-rate bonds may be in for a big disappointment as interest rates seemingly continue to plunge since the launch of the Funding for Lending program last August 2012.
Generally speaking, bonds are thought of as the more secured type of investment. The risk that you will not get your money back is small and it is a consistent income generator. Corporate bond payments are reliable and have stated definite maturity dates.
In short, when you invest on a bond, it is like you are lending your money to the issuer, the government, the municipality or highly rated corporations for a definite period of time. The bond holders will then be paid back the amount loaned plus the earned interest.
Barring a default, the investor will know exactly when they will receive their income and the principal back. This system is ideal for investors who have already allotted the income from this investment to certain expenses.
There are different types of bonds where you can put your money on – the government-backed UK government bonds, municipal bonds which are issued by highly rated government municipalities which offers tax breaks on interest earned from the investment, retail bonds issued particularly to retail investors, Permanent Interest Bearing Shares (PIBS), an instrument issued by building societies in UK, and convertible bonds where the investor can convert the proceeds upon redemption to an equity of the issuing company, among others.
The junk bond, on the other hand, offers higher yield but risks could also be correspondingly high. A junk bond could be issued by a company that has not been doing well and manages to beat the odds. With upgraded credit rating, the bonds it issues will enjoy a considerable increase in interest rates.
The important thing that savers should consider is that yields from their investment should be greater that the inflation rate to preclude further loss of value of the investment over time. Savers should look into investment with shorter terms for flexibility and ease of transferring to other deals giving higher rates.
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