M&G Spin-Free Guides – What are bonds?

??> ££ Bonds can seem complicated but they might suit if you need a regular income. If you don't know your coupon from your credit, this guide is designed for you. What are bonds? A bond is basically a loan. When you buy a bond, you lend money to the government or company that issued it. You then typically receive regular interest payments (coupons). This is normally a fixed amount that is set At the time when the loan is scheduled to end (the maturity), the amount you originally lent is paid back to you. when the bond is issued. What are the different types of bonds? Government bonds Corporate bonds Issued by companies. They can offer higher Issued by countries, normally to raise money for public spending. Different interest payments as they are often countries have seen as riskier than different levels government bonds. of risk. Investment grade You're less likely to lose money on these bonds, but you'll probably get High yield Lower credit rating than investment-grade. Index-linked The value of payments is adjusted in line with inflation. This means less interest as well. you will probably get more if inflation rises. What drives their value up or down? l. Interest rates A rise in rates causes a fall in bond prices, and vice versa. The interest on a bond is fixed at the start, so the Inflation Things tend to get more expensive over the years. Because the interest paid on a bond is fixed, the real value of that payment could be worth less Issuer outlook If a bond issuer's finances get worse, its credit rating - the measure of its ability to repay debt – may be downgraded. Its price may fall as investors decide that the interest doesn't make up for the increased risk of a missed payment. bond doesn't benefit from rising rates, like savings do. The longer the maturity, the greater the impact. over time. More investors want to buy but fewer bondholders want to sell More bondholders want to sell but fewer investors want to buy VALUE INCREASES VALUE DECREASES How do you make money from bonds? Income: coupons Capital return You know exactly how much you'll receive and when, assuming the issuer doesn't miss payments. If you buy a bond from another investor for less than its original cost. .you could make a profit by holding it to maturity. A case for bonds RISK RISK FSK LOW HIGH LOW HIGH LOW HIGH LOW HIGH HIGH LOW HIGH LOW HIGH LOW HIGH LOW RETURN RETRN RETUR Cash savings Bonds Equities Property Will I receive an Generally higher, stable income. Not guaranteed, dependent on the dividend and will Generally higher, can fluctuate but Low, in line with interest rates. income? Usually fixed. should remain fluctuate. stable. Is my initial investment secure? Up to £85,000 Not secure and may fluctuate sharply. Not secure but Not secure but protected in a bank or generally safer than equities. generally safer than equities. building society. Will my Some growth potential. Some growth Low growth. You could lose money if investment grow? the interest rate is High growth potential. potential. less than inflation. What is a bond fund? An experienced fund manager You can pool your money with other investors to buy a range of bonds, diversifying to reduce exposure invests and manages on your behalf. An active manager aims to outperform other similar bond to any one government or FUND company. funds. The value of stockmarket investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser. M&G INVESTMENTS Issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The registered office is Laurence Pountney Hill, London EC4R OHH. Registered in England No. 90776