Introduction To Fixed Income Bonds
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by: Sam Benson
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Word Count: 350
Understanding Bond Types
Bonds are IOUs. When you purchase a bond, you are, in effect, offering a loan to the issuer of the bond (government or other organization). Bonds are packaged in several different ways. When they're issued by the government, they're called "gilts" and are considered risk-free. "Conventional gilts" pay a semi-annual coupon with a maturity date set in the future.
By contrast, Index-linked gilts are directly linked to the UK Retail Prices Index (RPI). As a result, there's usually more volatility reflected in their prices. "Perpetual gilts" don't have a set maturity date. That is, the government decides when (or if) the principle will ever be repaid to the bondholder. That makes this type of bond volatile.
"Sterling denominated non-gilts" are tied to the GBP. They can be issued by the governments of other countries, banks in the UK, or even medium-sized businesses. While conventional gilts are deemed risk-free, the daily market prices of "Sterling denominated non-gilts" are impacted by the perceived creditworthiness of the issuer. There are also "convertible bonds," "subordinated bonds" and "floating rate notes." Each behaves differently and you should consult your financial adviser to build a proper portfolio.
Benefits Of Owning Bonds
Though most investors are enamoured with equities, there are plenty of reasons to include fixed income bonds in your investment portfolio. First, they offer security that is unmatched by equities. Second, most bonds offer the return of capital to the bondholder at the maturity date. Third, a reliable source of income can be valuable, especially for older investors. Fourth, fixed income bonds provide diversification to your portfolio, reducing your vulnerability to a given economic environment.
Fixed Income Bonds For Your Portfolio
A portion of fixed income bonds can find a place in any investor's portfolio. While they don't usually provide high returns, they offer security, preservation of capital, reliable income and diversification. Speak with your financial adviser to determine the type of bonds that are appropriate for your investment objectives. They may not be glamorous. But, there are plenty of reasons to own them.
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