A bond is a type of investment where you lend money to a company or the Government. In return, you receive a fixed rate of interest each year and the company aims to pay back the capital at the end of a stated period. However, the value of the bonds usually depends on the stock market, meaning there is a risk you may not get back as much capital or interest as you hoped. There are two main types of bonds – corporate and government.

Corporate bonds

Corporate bonds are bought and sold on the stock market. Whilst the amount of interest that companies pay on bonds is fixed, this is usually at an amount – say £8 per year – rather than a percentage – say, 8 per cent. This interest is known as the coupon. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount at maturity.

If the value of the bond increases, for example to £150, the amount of interest you receive – £8 – will seem like a poor return and when the bond matures, you will receive only £100 back, not £150.

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If the bond decreases in value, say to £50, £8 will seem like a good return and you will double your money when the bond matures.

Corporate bonds are one of the main ways companies can raise money. As the credit crunch is making it increasing hard to obtain loans from banks, experts say there is now some great buying opportunities for corporate bonds. Ben Yearsley, Investment Manager at Hargreaves Lansdown, says: “Companies keen to raise money are offering high coupon rates in an effort to attract investors. This in turn means many bond funds are yielding between 7 and 10 per cent at the moment, with some prospects of capital growth as well.

Mr. Yearsley adds that whilst it can be difficult to buy individual bonds, investing in a Corporate Bond Fund will allow you to invest in a wide range of bonds that can maximise your chances of a good return.

Government bonds (Gilts)

With these bonds, also known as gilts, instead of lending money to a company, you are lending to the Government. This is generally seen as a safer investment option as the Government is unlikely to be unable to pay your money back. However, they generally offer lower rates of interest than corporate bonds.

Gilts pay a fixed rate of interest twice a year – so for example, an investor who holds £1,000 nominal of a 4 per cent Treasury Gilt 2016 will receive two coupon payments of £20 each on 7 March and 7 September. The £1,000 will be repaid on 7 September 2016.

Gilts can be bought and sold through the government's Debt Management Office (DMO), which produces a guide to buying gilts.

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