Bond basics

With much talk of Eurobonds it’s been hard not to know more about them than you might want to but if you are still not sure Enable’s IFA’s can take you through the basics. Governments borrow money by selling securities known as bonds to investors. In return for the investor's cash, the government promises to pay a fixed rate of interest over a specific period - say 4% every year for 10 years. At the end of the period, the investor is repaid the cash they originally paid, cancelling that particular bit of government debt. Government bonds have traditionally been seen as ultra-safe long-term investments and are held by pension funds, insurance companies and banks, as well as private investors. They are a vital way for countries to raise funds.

Once a bond has been issued - and the government has the cash - the investor can hold it and collect the interest every year until it is repayable. But investors can also sell the bond on the financial markets. The price of the bond will fluctuate as the outlook for interest rates changes. So, for example, if the markets think that interest rates are going to rise sharply, then the value of a bond paying a fixed rate of 4% for the next 10 years will fall. Bond prices will also fall if investors think that there is a risk of the government that issued the bond not being able to make the annual interest payment or repay it in full on maturity . The key thing to remember is that bad news drives down bond prices, which pushes up bond yields.