Financial Products Series: Bonds

The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the tenth in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:

1. Shares
2. Structured Products
3. Cash
4. Current Accounts
5. Savings Accounts
6. Annuities
7. Certificate of deposit
8. Options
9. Treasury Bills
10. Bonds
11. Tracker funds
12. Credit

If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Bonds

Picture from freedigitalphotos.net

We have partially covered Bonds already in this series when we looked at Treasury Bills and Gilts. Both were types of Government Bonds. In general Bonds are loans. When an individual purchases a Bond from a bank/ financial organisation they are essentially loaning the money to that institution.

Interest is paid depending on the terms of the Bond. It could be paid every month, quarterly, annually or at the end of the investment term. The size of the interest depends on the term of the Bond and the amount invested. At the maturity date the Bond pays out the original principle (amount originally invested in the loan).

Some Bonds have what is called a floating rate. This means that the interest paid by the Bond is determined by market conditions.

There are many different types of Bonds on offer. You will need to go to a bank to see which one suits your capital and your needs. Bonds can also be traded.

Advantage

• Can Utilize ISAs
• Fairly risk free investment - the principle and interest will always be paid unless your buy a floating rate Bond

Disadvantages

• Not huge returns. Bigger returns are found in shares
• Inflation can erode the principle

Overall conclusion

Bonds in principle seem to be quite good but I can't understand why an individual wouldn't just put their money into a higher rate savings account.

Score: 7

Advice: If an individual particularly wanted Bonds I'd point them towards higher rate savings accounts, especially if they were thinking of utilizing their ISAs.

Readers, thoughts? Opinions? Are any of you 'Big Bond Lovers'? Love a bit of Bonding?

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