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.

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

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.

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.

Governments and businesses often need to borrow money to help finance their operations. One very popular way to do this is to issue bonds. Do not confuse bonds in this context with "fixed term bonds" offered by savings institutions. The latter are just another form of savings account, but with strict withdrawal restrictions attached. To understand exactly what government and corporate bonds are it is worth becoming acquainted with some of the jargon that is associated with this specific type of investment:

Also known as the principal or par value, this is the amount that will be paid back to the bondholder when the bond is redeemed.

It is common practice for bonds to pay a fixed rate of interest for the entire term of the loan. The coupon is the annual interest that will be paid expressed as a percentage of the nominal value.

The date on which the issuer agrees to pay back the nominal amount.

For example, ABC Trading might issue a bond with a nominal value of £1,000, paying a 5% coupon with a maturity date of 31st December 2030. This means that ABC Trading will pay £50 interest each year, with full repayment of the nominal amount taking place on 31st December 2030. The good news is you do not have to wait until 2030 to get your money back. A big attraction of bonds is they are tradeable - they can be bought and sold. However, because bonds are tradeable, bond prices can vary depending upon supply and demand on the day. As a result you may end up buying a bond for more or less than the nominal value. This will affect your potential rate of return:

You will receive less back on the redemption date than you paid for the bond.

You will receive more back on the redemption date than you paid for the bond.

To allow for this a key measure of bond performance has been developed called the redemption yield. This states the average annual rate of return you will achieve if you hold the bond to the redemption date, taking into account the annual coupon and the capital gain (or loss) that will arise when the bond is redeemed.

Bonds available to private investors are traded on the London Stock Exchange. More information can be found on how to buy and sell bonds, along with details of bonds currently available, on the London Stock Exchange website.