The M&G guide to Bonds
Explaining the world of bonds
Bonds can seem complicated at times,
but if the idea of a regular income appeals
to you, it’s worth finding out more about
them. If you don’t know your coupon from
your credit rating or your principal from
your par value, this guide is designed for
you. Our aim is to give you the basics, to
help you make informed decisions about
your investment aims.
Depending on your situation and your
financial goals, investing in bonds could
be right for you. But if, after you’ve read
this guide, you think you’d be better
suited to something different, there are
a variety of other investment options for
you to have a look at. These are explained
in more detail in our other M&G guides;
see page 16 for more details.
So, what are bonds?
● A bond is a loan
● When you buy a bond, you’re
lending money to the government
or company that issued it
● They should give you regular interest
payments in return, plus the original
amount back at the end of the loan
The value of your investment can go
down as well as up so you might not
get back the amount you put in.
The name’s Bond...
Often referred to as bonds, they’re
also known as ‘fixed income’ or ‘fixed
interest’ securities. It’s likely you’ll
come across all these terms when
you read about investments. They’ll
describe the same thing, so we’ll just
call them bonds in this guide.
Understanding the risks
Importantly, there’s a chance you won’t
be repaid your original investment, which
is the key risk you face when investing
in bonds. It’s one of the reasons they’re
considered to be higher risk than just
putting your money in a savings account
(although bonds are still generally lower
risk than investing in company shares,
or equities).
Where things get a bit more complicated
is that bonds can be sold on – just like
a company’s shares. This means their
price can change. We’ll explain this
in more detail on the next few pages.
Three words you
need to know...
Before we go any further, there are three
words we need to introduce. They are
‘principal’, ‘coupon’ and ‘maturity’:
● The principal is the amount
you lend to the government
or company issuing the bond
● The coupon is the regular interest
payment that you receive for buying
the bond. It’s often a fixed amount
that is set when the bond is issued
● Maturity is the date when the bond
expires and the principal is repaid
Returns from bonds
Income coupons
You know exactly how much you’ll receive
and when, assuming the issuer doesn’t
miss payments.
Capital return
If you buy a bond from another investor
for less than its original cost, you could
make a profit by holding it to maturity.