A bond is a loan that a corporation takes out. The company gets money from investors who purchase its bonds instead of going to a bank. The company pays an interest coupon in return for the capital, which is the total interest rate paid on the bond calculated as a percentage of the face value.
Key Points to know
- Companies or governments may issue bonds and usually pay a fixed interest rate.
- Over time, a bond’s market value varies as it becomes more or less appealing to potential investors.
- Higher-quality bonds (more likely to be paid on schedule) typically offer lower interest rates.
- Bonds that have shorter maturities appear to give lower interest rates (length before complete repayment).
Why should an individual buy bonds?
Bonds are issued by companies and governments when they wish to raise funds. An individual is giving the issuer a loan by purchasing a bond. They promise to pay you back the loan’s face value on a particular date and pay you periodic interest payments usually twice a year.
When you keep them as part of your portfolio bonds then give you two possible benefits:
- They give you a source of income, and
- They reduce some of the uncertainty you might see from holding stocks.
What are Premium Bonds?
Premium Bonds are an investment option granted by the National Savings and Investment (NS&I). An individual can enter into a monthly lottery draw through premium bonds to win between £ 25 and £ 1 million tax-free prizes, unlike most investments, where only interest or a daily dividend income is received.
The functioning of premium bonds
- An individual is entitled to pay at least £25.
- An individual can continue to purchase bonds until they hit the maximum holding level of £ 50,000
- For every £ 1 invested, an individual gets a unique bond number. So, he/she will get 100 bond numbers if they save £ 100, (each with a chance to win a prize)
- An individual can purchase bonds for himself/herself or on behalf of their children or their grandchildren. To buy Premium Bonds for yourself, an individual must be at least 16 years old.
How to buy premium bonds
Buying Premium Bonds is simple; an individual can apply through the NS&I website.
Alternatively, an individual can apply over the phone by calling, but NS&I have asked individuals to call ‘if they have to apply.’
Also, be purchased for children under the age of 16, say if an individual wanted to buy for nephew, niece, etc. To take care of the child’s funds before they turn 16, guardians or parents may need to be nominated.