Types of Bonds - A look at Investment Bonds

Bonds are similar to gilt’s but instead of being issued by the government they are issued by Corporations or Local Authorities. Yields on bonds tend to by higher than that of gilt’s because unlike gilts bonds are not guaranteed by the government. In the main bonds can fall into three categories Local Authority Bonds, Corporate Bonds and Eurobonds.

Interest on Bonds is paid net of 20% income tax. Non tax payers and lower rate tax payers can reclaim overpayments.  Higher rate tax payers have a further 20% tax to pay. Capital gains on bonds is usually free of tax, however convertible loan stock is subject to CGT.

Types of Bonds that exist are explored in depth below:

Debentures – The loan is secured on the companies assets either fixed on a specific  asset  or floating on the assets in general. The Bonds debenture holder has priority over creditors in the event of company wind up.

Loan Stock – Securing loan stock against assets is common.  As a result the risk is higher and yields higher.

Convertibles – A debenture or loans stock with the option to convert to a companies shares at a set time and set price.

Preference Shares – Part of the share capital of the company. Normally ranking before ordinary shares but after bonds for dividends. Dividends normally fixed.

Deep Discount Bonds – Issued by companies and pays a very low coupon during the term. They are issued and traded at a discount to the par value typically 20% from the market value. Types of bonds that are deep discount are usually callable which means the company can by it back before the end of the term.

Zero Coupon Bonds – As deep discount bonds but with no interest during the term. The par value is repaid on redemption which means  the investor is buying a potential capital gain that might be as much as 100%.

Junk Bonds – These types of Bonds are for companies that have been rated as having a poor financial strength. Normally pay a higher yield due to the higher risk involved.