The M&G guide to Bonds

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.

The M&G guide to Bonds