UK government bonds are referred to as 'Gilt-Edged' bonds or 'Gilts'. They are widely regarded as the safest bond investments since they are backed by the UK government and therefore have the highest credit rating.
These are bonds issued by institutions such as the European Investment Bank (EIB) and the World Bank. As with government bonds, they are regarded as the safest bond investments and have a high credit rating.
Corporate bonds are issued by companies and are more risky than government or supranational bonds because companies are much more susceptible than governments to economic problems, mismanagement and competition.
Corporate bonds can be the most lucrative fixed-income investment, as you are generally rewarded for the extra risk you are taking. The lower the companies credit quality, the higher the interest you're paid.
Zero Coupon bonds do not pay periodic interest like normal bonds. Instead, zero-coupon bonds are sold at a deep discount. The investor's total return is represented by the bond's appreciation to start at maturity.
These are bonds in which both the coupon and the capital redemption are linked to the rate of inflation. Index-Linked bonds have a greater role to play in times of high inflation.
These are corporate bonds which give the holder the option to exchange the bond for a predetermined number of shares in the issuing company. They offer a slightly lower interest rate than corporate bonds because they can be changed into stock and so benefit from a rise in price of the underlying stock. If the stock performs poorly there is no conversion and the investor is left with a lower return than a non-convertible corporate bond would provide. This is the trade off between risk and return.
Sometimes, bonds may be issued with the option to convert into other bonds. These are different to the 'equity convertibles' explained above.
Permanent Interest Bearing Shares (PIBS)
Permanent Interest Bearing Shares (PIBS) are fixed interest securities issued by Building Societies to raise capital.
PIBS can be bought and sold on the LSE in round amounts, usually varying from 1,000 shares up to 50,000 shares. No stamp duty is payable on purchases. Unlike Gilts, PIBS cannot be redeemed, so in order to sell there has to be a buying counterparty in the market, therefore you may not be able to sell when you want to. PIBS are relatively illiquid, as the number/amount in issue is relatively small.
Like other fixed interest securities if interest rates rise then the value of a PIBS goes down; conversely, if interest rates fall then a PIBS value rises. There are also variable rate PIBS, where the interest rate changes in line with interest rates generally. Interest is payable annually or six-monthly in arrears. Rates are normally higher than the returns for Gilts.
Risks associated with PIBS
In the event of a Building Society becoming insolvent, all other investors would be paid first, and only if there was sufficient left would the PIBS holders be repaid.
Theoretically PIBS are riskier than other Building Society investments and therefore generally attract a higher interest rate than ordinary Building Society cash accounts. Unlike other Building Society Investors, PIBS holders are not covered by The Financial Services Compensation Scheme.
Taxation associated with PIBs
PIBS are exempt from Capital Gains Tax but income is subject to Income Tax on interest. Income is paid gross with tax deducted through an individual's tax return.
PIBS can be held in Tax efficient Accounts: Trading ISA and SIPP.
Which account should I choose to invest in Bonds and Gilts?
You can invest in fixed interest bonds and gilts through our Trading Account, Trading ISA or SIPP Accounts.