Investing in Bonds

The benefits

For investor’s looking to diversify their portfolio, bonds can provide an excellent alternative to stocks and shares helping to provide a hedge against the volatility of more risky investment options. Bonds guarantee the investor a fixed return, and steady income stream over a fixed period of time.

What is a bond?

Bonds are essentially a loan payed by the holder to the bond issuer in exchange for fixed payments, payed back over a specified amount of time. The loan is often used to fund some kind of project by the issuer and in most cases the bonds are secured by a physical asset in order to protect the investor.

Fixed/guaranteed income

Bonds pay fixed interest rates meaning you are guaranteed a certain amount of money back each year that you hold the bonds. Dividends are normally paid quarterly, and payments are made direct to your bank account. Whilst some bonds are a long-term investment and mature over 5 years plus, there are also short-term bonds available that pay your money back within a year or even less making them a great investment for investor’s that need a more liquid investment.

Higher dividends

Bonds typically pay out a higher than average rate of dividends, typically ranging from 8 to 12%. This is a lot higher than most banks so investing your money into bonds will earn you a lot more than investing your money in a standard rate ISA.

Tax advantages

Bonds can provide certain tax advantages holders, particularly if you’re a higher rate taxpayer. All gains and income earned from investment bonds are taxed at 20% and are paid directly out of the bond. Holders are also permitted to withdraw up to 5% a year for 20 years without incurring additional charges. If you don’t withdraw your 5% allowance, then it is carried over to the following year which means higher rate taxpayers can minimise their tax bill through clever bond investments.

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