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Bonds (Loan Stock)

A 'bond' is an undertaking to pay you a guaranteed 'fixed rate' of interest for a period of 1 - 5 years, with a heavy penalty for cashing in early. Bonds are a good alternative to unpredictable dividends from shares, and are an attractive proposition from government, banks and building societies. The 'bond' that we are all familiar with is the National Savings premium bond and although you forgo the interest, you are entered into a monthly draw for prizes ranging from 50 to 1million: but don't hold your breath as the lottery gives you a 1 in 14 million chance, premium bonds give you a staggering 1 in 13 billion chance of a million pounds! If you can afford the maximum holding of 30,000 the premium bond should return over 5% interest in prizes, and the odds on winning a million drop to below 1 in 700,000.

'Corporate bonds' differ from a standard bond as they are issued by the larger company seeking funds, without issuing shares in the company. As the bond is issued by a company and not a bank, building society or the government you take the risk of the company trading well whilst you have the bond. The bond pays out a fixed interest rate and usually has a life of 7 - 10 years. The bond can be sold, or the interest taken until you redeem the bond for, hopefully, no less than the original purchase price: although the interest is guaranteed, your original capital is not. The Interest rate (our own UK bank base rate) can decide the worth of the bond: if rates go up, the bond selling price drops - as, with a drop in rates the bond selling price will rise (if interest rates fall to 3%, and you have a bond paying a fixed rate of 6%, you have a sellers market).

'With profits bonds' are a balanced return on investment over a period. In good years some profit is withheld, and in bad years that profit is returned to you. This means a pretty average return over the life of the bond and so ensures a more reliable annual income. A 'terminal bonus' is paid at the end of the term depending on the on the performance of the stock market. This bond is usually for those with over 10,000 to invest and therefore mitigating the fees, and for those who are willing to go the full term.

'Other investment bonds' are single premium life insurance contracts where the primary objective is to grow the money. They can be used to assist in inheritance tax planning also and operate much like 'collective investments' but are wrapped up in a product generically referred to as a bond.