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Bonds

Bond performance

Bonds offer a half-way house between savings accounts and shares. They can offer better rates of return than savings accounts, whilst at the same time being less risky than shares. Investors tend to favour bonds when they are looking to build a reliable long-term income stream, such as would be the case when entering retirement.


Bonds can be issued for a variety of terms, ranging from just a few months to 30 years or more. The following table summarises the rates of return being offered on United Kingdom government bonds and corporate bonds that are currently available to private investors. The rate quoted in each instance is the average annual redemption yield, where the redemption yield is the annual rate of return you will earn on a bond if you hold it to the redemption date.

AVERAGE ANNUAL
REDEMPTION YIELD
TERM TO REDEMPTION
GOVERNMENT
CORPORATE
1 year
0.0%
8.7%
2 years
0.0%
6.4%
3 years
-0.1%
4.2%
4 years
0.0%
3.8%
5 years
0.0%
0.1%
10 years
0.3%
2.7%
20 years
0.8%
1.9%
30 years
0.8%
1.9%

There are two key factors that can affect the redemption yield achievable on a bond:


Issuer

The credit-worthiness of the organisation issuing the bond will impact upon the rate of return on offer. Bonds issued by the United Kingdom government are deemed to be the safest form of investment available as they are guaranteed by the Government and, as such, tend to command the lowest yields. Depending on the organisation, corporate bonds can vary from very low risk to very high risk: the higher the risk the higher the rate of return on offer will tend to be.


Term

As a general principle, when looking at bonds with a similar risk profile, the longer you have to wait until the redemption date the higher the rate of return on offer will tend to be.

What is a bond?
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