Buying Bonds for Income? Read This First

How
Will
a
Bond
be
Titled
on
an
Investment
Platform?

Let’s
look
at
two
random
bonds
for
sale
on
an
investment
platform:
“Treasury
4.75%
07/12/2030”;
and
“Treasury
0.125%
30/01/2026.”
The
label
describes
the
issuer
(HM
Treasury,
AKA
the
UK
government),
the
coupon
as
a
percentage,
and
the
maturity
date,
which
shows
when
the
bond
will
pay
back
the
capital,
a
key
feature
of
bonds.

What’s
The
Difference
Between
Coupon
and
Yield?

By
way
of
theoretical
example,
in
the
case
of
“Treasury
4.75%
07/12/2030,”
investing
at
the
start
of
the
bond
would
lock
in
a
payout
of
£4.75
for
each
nominal
£100
invested
(we
have
used
the
£100
figure
as
a
round
number
for
simplicity
–
but
if
you
want
to
buy
bonds
in
batches
of
£100
your
fund
supermarket
should
allow
you
to
do
this!).
That’s
why
it’s
called
“fixed”
income.
Buying
this
10-year
bond
at
the
start
secures
that
4.75%
for
the
life
of
the
bond
(assuming
the
UK
government
doesn’t
default
on
its
payments). 

But
a
bond’s
yield
may
vary
throughout
the
term
of
the
bond
itself,
depending
on
the
price.
Yield
is
the
rate
of
return
on
the
coupon
payments,
and
is
normally
calculated
by
dividing
the
headline
coupon
payment
by
the
bond’s
current
market
price.
Nevertheless,
buying
this
bond,
even
with
six-and-a-half
years
to
maturity,
will
still
provide
a
payout
of
£4.75
every
year
even
if
the
yield
is
above
or
below
that.

What
About
Total
Return?

Income
is
a
factor
in
bond
returns
and
these
depend
on
when
the
bond
was
purchased
and
at
what
price.
Read
more
in
our
article

Want
to
Buy
UK
Government
Bonds?
Be
Careful.

When
Do
Bonds
Pay
Out?

The
convention
for
bonds
is
for
semi-annual
payments;
so
a
£10
coupon
will
be
split
into
two
equal
parts
in
the
middle
and
end
of
the
year.
Depending
on
when
the
bond
is
bought,
an
investor
might
miss
out
on
a
full
bi-annual
payment
and
only
receive
a
partial
payment.
The
previous
owner
is
entitled
to
a
portion
too!

What
About
Corporate
Bonds?

Buying
the
debt
of
a
company
is
very
different
from
buying
government
bonds
from
sovereign
nations.
But
both
receive
credit
ratings
from
agencies.
Companies
are
more
likely
to
default
than
a
government,
so
their
bonds
have
higher
yields.
This
can
tempt
investors
looking
for
higher-risk
investments.

What
Determines
a
Corporate
Bond’s
Yield?

A
company
like
Shell
is
likely
to
have
a
better
credit
rating
than
a
small,
heavily-indebted
corporation.
The
distinction
here
is
between
investment
grade
or
junk/high-yield
bonds
issued
by
companies.
This
is
known
as
the
credit
spread
or
yield
spread.

The
better
the
credit
rating,
the
lower
the
borrowing
costs
for
the
company
or
government.
While
the
risk
of
default
is
lower
for
an
investor
(which
improves
your
chances
of
getting
paid),
the
yield
is
lower
because
the
debt
is
less
risky.

In
times
of
recession
or
market
stress,
more
vulnerable
companies
tend
to
have
higher
yields.
But
they
are
also
more
likely
to
default.
And
the
same
goes
for
governments:
in
2012
Greek
debt
had
an
enormous
yield
but
the
country
defaulted
before
an
International
Monetary
Fund
rescue
package
could
take
the
edge
off
the
pain.

What
About
Bond
Prices?

A
bond’s
yield
moves
inversely
to
price.
So
high
demand
for
certain
types
of
bonds
will
push
up
the
price
but
push
down
the
yield.
Media
outlets
often
talk
of
“bond
rallies”,
which
means
prices
are
rising
and
yields
are
falling.
Whether
bond
prices
rise
or
fall,
the
coupon
stays
the
same,
but
the
yield
adjusts.
Interest
rates,
inflation
expectations,
economic
growth
and
demand
for
bonds
themselves
all
have
an
impact
on
prices.

Are
There
Any
Bonds
That
Don’t
Pay
Regular
Income?

“Zero-coupon”
bonds
do
not
pay
incremental
interest
payments
in
the
way
traditional
bonds
do,
but
you’ll
still
find
them
issued
by
governments
and
corporations.
Because
investors
only
get
paid
once
their
bond
reaches
maturity,
zero-coupon
bonds
trade
at
deep
discounts.

I
Want
a
Monthly
Income,
Are
Bonds
Suitable?

Six-monthly
coupon
payments
may
not
suit
an
investor
wanting
monthly
income.
But
there
are
plenty
of
other
ways
to
receive
bond
income
more
regularly
than
every
six
months.

Many
ETFs,
funds
and
investment
trusts
are
available
and
tailored
to
those
who
need
a
more
regular
income,
be
it
from
bonds
or
stocks.
Many
savings
accounts
also
offer
a
range
of
payment
timetables.

Are
Bonds

Just
for
Income?

No.
They
perform
a
variety
of
functions
in
a
portfolio.
They
can
be
bought
to
lower
volatility,
add
diversification,
match
specific
commitments
to
time
horizons,
and,
crucially,
for
capital
security.
The
predictability
of
bond
income
payments
and
maturity
dates
often
suits
pension
funds,
for
example,
whose
payments
to
pensioners
come
at
specific
times.

Long-term
government
bonds
help
pension
funds
make
payments
because
they
know
they
will
get
predictable
income
and
will
get
their
money
back
at
the
end
of
the
holding
period.

Buying
stocks
for
income
is
more
perilous;
companies
can
cut
or
axe
their
dividends
or
even
go
bust.
And
don’t
forget:
bondholders
take
priority
over
shareholders
when
an
insolvent
company’s
remaining
assets
are
liquidated
for
compensation.

What
Happens
to
UK
Bonds
Next?

At
the
moment,
UK
government
bond
yields

suggest rates
will
not
fall
dramatically
as
inflation
hangs
around.
But
financial
market
assumptions
are
changing
all
the
time.

Jupiter
fixed
income
manager
Ariel
Bezalel
explained
this
well
at
the
Morningstar
Investment
Conference:
with
bonds
you
have
to

factor
in
a
range
of
scenarios
this
year
and
these
will
affect
your
returns. UK
government
bonds
with
4%
yields
may
look
attractive
now,
especially
if
interest
rates
start
to
fall
this
year,
but,
as
above,
yield
isn’t
the
only
factor
at
play.
As
ever,
seek
regulated
financial
advice
if
you’re
stuck!

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