Learn about bonds

Shares and bonds are very different kinds of investment. Shareholders own the company, bondholders simply lend it money. This means the risk / reward profile is very different. Bondholders just need the company to have enough cash to repay the loan and service the debt. Profits could halve, the ordinary dividends could be slashed but, as long as the company can meet its obligations to bondholders, they should continue to receive a high, fixed rate of interest and their capital back at redemption. In terms of risk and reward, therefore, bonds generally sit between cash and shares.

Security

The risk of the UK or other major governments being unable to repay their debts is low and government bonds should be considered superior in credit quality to a bank deposit in theory. In practice though the Government underwrites bank deposits putting them on a par. High grade multi-national government agencies (such as the World Bank) also offer an extremely safe home for the investor holding bonds to maturity. Of course, not all bonds are issued by governments. Many bonds are issued by companies and other organisations whose ability to service the debt may be less certain. However, even corporate debt can be considered a safer investment than the company’s equity. In the event of bankruptcy, bondholders are ranked above shareholders in their claim on the company’s assets. However, if the company can't meet its obligations to bondholders, their capital and income is at risk.

Return of capital

Bonds also differ from equities in one other very important aspect. In order to realise your profit (or loss) on an equity, you are wholly dependent on the ability to sell the instrument back to the market. When an investor buys a bond, the redemption date and value is fixed in advance. Assuming the issuer is able to repay, the investor’s reliance on the uncertainties of future market sentiment or liquidity is reduced.

Income

With an ageing population requiring an ongoing income, amongst a balanced portfolio, bonds can add a degree of reliable income to a portfolio. Income available from bonds is generally higher than that available from equities. Also, future income payments are a relatively known quantity, unlike dividends from equities, which may be reduced or withheld entirely in times of low profitability. This generally makes bonds a good choice for investors who wish to shelter future income over a defined period of time. With bonds paying annually, semi-annually or sometimes quarterly, a carefully chosen bond portfolio with multiple holdings can produce a reliable monthly income. Remember also that most bonds pay their coupons gross, without withholding tax. Investors can take advantage of this by holding qualifying bonds within an ISA, producing a tax free income. Remember tax rules can change and the reliefs depend on your personal circumstances.

Diversification

A well managed portfolio should contain a variety of different assets classes. Equities, government bonds, index-linked bonds, corporate bonds, and alternative assets all have their role to play. This simple approach of diversifying a portfolio is one of the most effective strategies for reducing risk. In certain economic scenarios, such as a recession, some bonds will offer a shelter against falling share prices.

Interest rates

When an investor buys a fixed coupon bond, he or she locks in interest rates for a defined period. If interest rates rise, the income from a bond becomes less attractive and the market value of the bond will fall. Falling interest rates will cause the market value of the bond to rise. Investors who buy bonds in falling interest rate scenarios will receive the double benefit of a secure income and capital appreciation of their asset. Investors must note that interest rates are at an all time low and are likely to rise from here.

Speculation

Any financial instrument offers the potential to speculate on future price movements, and bonds are no exception. Liquid government bonds are often used by traders speculating on future interest rates while corporate bonds can see sharp price movements from changes in the perceived credit quality of the issuer.

All investments involve risk, and bonds are no exception. Investments can fall in value as well as rise and you could get back less than you invest.

Risk of default

There is a risk that the issuer will be unable to return all or some of the capital and interest payments. In the bond markets this is known as a default. The equivalent in the equity market would be a company going bust, ceasing to trade, or being forced into administration.   

Market risk

The investor buys an asset at price "X". This price will then fluctuate from day to day according to the balance of supply and demand in the market, creating a paper profit or loss. Thus, if the investor needs to sell the asset before maturity to raise funds, he faces a risk of capital loss.  

Issue-specific risk

Many bonds are issued with imbedded features such as "calls", which enable the issuer to repay the debt ahead of schedule. This can be disadvantageous to the holder. However, such features are clearly laid out in the bond prospectus, so careful investors can either avoid such issues, or make contingency plans. If you are unsure of the suitability of an investment please seek advice.

Event and other risks

This encompasses a variety of "operational" hazards such as a shift to an unfavourable or punitive tax treatment, remember tax rules can change and any reliefs depend on your personal circumstances. These types of risk can be reduced through careful planning and monitoring. Next we have "event risk". An example of this would be the issuer of the bond becoming the target of a leveraged buyout - a buyout where by the company taking over the issuer is buying with the use of debt, increasing the degree of risk of lending money to the company. Finally, we add to this list the risk of inflation, which can devalue the asset or portfolio over time.

Frequently asked questions

Are bonds more, or less risky than equities?
It is fair to say that bonds are generally less risky than equities. Price volatility in bonds is generally lower than that seen in equities. Risk adverse bond investors should restrict themselves to gilts and investment grade bonds and run a diversified portfolio. 

Are some bonds more risky than others?
Yes. Some issuers are more credit-worthy than others. For more on this subject see the article "Credit rating explained". Also consider that the longer until the maturity date of the bond, the more you are a hostage to the future movement of interest rates and inflation.

What happens if the issuer of the bonds goes bust?
In this event the issuer may be unable to pay the coupons or the capital (principle). However, the bond holders will have at least some priority over the assets of the issuer, ahead of the holders of ordinary shares.

Are there any other risks that I should be aware of?
Inflation is a major risk. Over longer periods of time this may erode the return of a bond portfolio, causing the value to fall in real terms. The outlook for inflation will have an impact on the market value of the bond and therefore if you sell before maturity it will impact on the value.

The prospectus for each bond will contain further details of risks.

Credit quality is a measure of the issuer’s ability to service and repay its debt. In the case of Gilts, and other high-quality government debt, they are given the highest level of credit rating. Investors may have their own knowledge and views on a company’s ability to repay debt or, alternatively, they can view the credit rating assigned to issuers by several of the credit rating agencies. Credit agencies deploy considerable resources to assess both the issuer and the individual bond. It is in the interest of bond issuers to obtain these ratings.  That said, it is the company itself which pays the ratings agency to rate their bonds and that does create a potential conflict of interest. There are two main international credit ratings agencies, namely Moody's and Standard & Poor’s.  

Credit ratings are the criteria used by most banks and fund managers when establishing the suitability of a bond as an investment but, remember, situations change quickly, and so can credit ratings. You can look up the rating of most bond issuers on the Moodys and Standard & Poors websites. Much research on this subject is also conducted by broking houses and investment banks, as well as some good up & coming independent analysts. However it is worth bearing in mind that movements in the issuers share and bond prices will usually occur prior to any change in the credit rating.

Here is Standard & Poor’s definition of the ratings it awards to organisations issuing bonds (a conversion table for Moody’s and S&P is shown on the right):

AAA Extremely strong capacity to meet its financial commitments. AAA is the highest issuer credit rating by Standard & Poor’s.

AA Very strong capacity to meet its financial commitments. It differs from the highest rated obligors only in small degrees.

A Strong capacity to meet its financial commitments, but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.

BBB Adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.

The above credit ratings are known as ‘investment-grade debt’. As a rule of thumb, investors managing portfolios where the risk must be minimised, and security of income and capital is paramount, will restrict themselves to bonds rated AAA and AA, with perhaps a few single A investments. Consider also a bond’s credit history. Has the rating improved or declined over time? Bonds subject to a potential re-rating will be on ‘credit watch”.

Below BBB Bonds rated below BBB are known as ‘non-investment grade’, ‘high yield’ or, less charitably, as ‘junk’ bonds. These bonds are of a more speculative nature, and imply a certain degree of risk. In view of this, the incremental yield available on the instrument must be adequate to compensate the investor for this risk. Standard & Poor’s gives the following definitions for non-investment grade debt.

BB Less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions that could lead to the obligor’s inadequate capacity to meet its financial commitments.

B More vulnerable than the obligors rated BB, but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitments.

CCC Currently vulnerable, and is dependent upon favourable business, financial, and economic conditions to meet its financial commitments.

CC Currently highly vulnerable.

C May be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. C ratings will also be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.

Plus (+) or minus (-) The ratings from AA to CCC may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.

Types of issuer

Before we go on to look at some examples of individual bonds and their credit ratings, it is worth considering the different classes of issuer that one might be likely to come across in the Sterling bonds markets:

As a rule of thumb, the bonds with the least risk of default are the high quality sovereign issuers such as the UK and the larger and wealthier European countries. The risk of default* for bonds issued by these countries can be assumed to be low, and less than the risk from a bank deposit. Ranking alongside these are the Supranationals, these being agencies such as the World Bank and the European Investment Bank which are supported by their sovereign members.  

Second to this are the second-line countries, and those experiencing some economic difficulty. Here we would give Italy and Japan as two examples. While these countries do not quite have the economic strength of some of their peers, this type of debt should not be confused with emerging market bonds, which carries a much higher degree of risk. 

Finally we have Corporate Bonds. These are bonds issued by corporations, typically large quoted companies. The life of a company is full of ups and downs and it is fair to say that in most cases corporate bonds carry a greater risk than those issued by major governments or banks.  Factors affecting a company's credit rating include cash flow, profitability, asset valuations and unforeseen events such as legal action, a takeover or a change of the trading environment. The yield on these bonds will normally be greater than that available on bank debt.

Other types of issuers: There are numerous bonds issued to fund mortgage loans, credit card loans and other more complex financial transactions. These types of bonds, often known as mortgage-backed securities (MBS) and asset-backed securities (ABS) are not generally available to the investing public in the UK. The credit quality of these can vary and investors should be sure of their suitability before buying.

*Note: risk of default should not be confused with market risk, or price volatility. A bond can be 100% guaranteed by all the governments in the world and still experience price swings between issuance and redemption, typically driven by changing interest rate volatility.

Some sample issuers and their ratings

Here we have taken a few of the popular issuers:

AAA
Germany and France. Supranational agencies such as the World Bank (also know as the IBRD). UK Gilts continue to enjoy a 'AAA' status, although this is under review at the time of writing.

AA
Sovereigns such as Japan (AA-). A few high quality banks and corporates.

A
Good quality corporates such as Tesco (A-). Lower rated banks.

BBB
More speculative corporates such as Marks & Spencer (BBB-) and British Telecom ( BBB-)

Note: These samples are based on the rating in force in August 2011, and are subject to change.

Frequently Asked Questions

• Will a highly rated bond be less volatile than a lowly rated bond?

  To a degree, yes. The perception of risk will tend to fluctuate less. However, the influence of interest rates, both in the present and to come will exert a similar influence on both highly and lowly rates bonds alike.

• What are 'junk bonds'?

  The expression 'junk' bond is an informal term for a non-investment grade bond, i.e. a bond that is rated below BBB-. In truth the term junk is often a rather harsh description and the majority of these bonds will live a useful and uneventful life, servicing both coupons and redemption payments. Nevertheless, a risk of default is implied in the name and caution should be applied when dealing in these assets.

• Can credit ratings change?

  Yes, although the ratings that we follow are described as "long term ratings" by the two main agencies, they can swing around quite quickly as perceptions change. An example of this was the sovereign state of South Korea, downgrade from a comfortable AA- to a worrying BBB- in the late 90's. Corporate bonds are even more subject to change as their issuers may be impacted by adverse trading conditions. Leveraged takeovers, in particular, can have a sudden and disastrous impact on credit ratings.

Investors will generally buy a bond for two reasons. The first is to lock-in a known future income stream. The second is to attempt to benefit from rising bond prices. But what would cause the value of a bond to rise? As with all traded assets, it will be down to our old friends, supply and demand. There are two main variables affecting the price of bonds, the first being interest rates and the second the perceived credit quality or risk of default for the bond. Let's consider the effect of the former on bond prices. As interest rates fall in the money markets, a bond paying a fixed rate of interest every year will become increasingly sought after by investors. Conversely, rising interest rates in the money markets, perhaps accompanied by inflation, will make the fixed income stream unattractive to investors and the market price of the asset will fall. This relationship between price and yield is the key to understanding the factors moving the fixed income markets.

Price & yield

To understand the return on all fixed income instruments is to view a bond as a series of discounted cashflows. At the start of the period, the investor pays out cash to purchase the bond. Over the course of the bond's life, the investor should then receive several payments, usually one or two a year from interest payments, known as coupons and a final repayment at the end of the bond’s life-span, known as redemption. In this respect, bonds differ fundamentally from equities, where the future cashflows are unknown.

Given that the future cashflows are known quantities, the relationship between the price of a bond and the yield received by an investor is governed by mathematical formulae. We are going to look at three methods of analysing a bond's yield; the income yield, the simple yield and the yield to maturity or YTM.

Income yield

Let's take an example of a Gilt, the UK Treasury 5% 2014. This bond pays a 5% coupon (divided into two semi-annual payment) and matures on 7 September 2014. Thus, if we were able to buy the bond at the face value of 100% or "par", we know we would receive an income 5% per annum on our investment until maturity.

But what would happen if we paid less than par for the bond? Let us assume that we purchase the bond for 95% of face value. Our income (or "running") yield would be:

Par/purchase price * coupon = running yield

Or 100/95 * 5% = 5.26% per annum.

At the time of writing this article (August 2011), the UK Treasury 5% 2014 is trading at a price of 112. This premium to par has the effect of reducing the bond’s income yield as follows:

100/112 * 5 = 4.46% per annum

The income or running yield (sometimes also known as the flat yield) does not take into account any profit or loss made by holding the bond to redemption, and simply assumes that the investor will be able to sell the bond at the same price that he or she purchased it for. For a more accurate measure of yield, we must turn to the Yield to Maturity, the standard calculation employed by market professionals, also known as the redemption yield.

Before we turn to the more complex (and more accurate) Yield to Maturity, it is worth considering the "simple yield". This is a good rough guide to the return available on a bond, and can often be worked out in one's head.

Simple yield

Let us take a theoretical bond with one year left to run until redemption. The bond has a 4% coupon and we have purchased it in the market for 97%. Our return will consist of two factors, the running yield over the 12-month period and the profit that should be made on maturity. Let us assume that we invest £1,000 nominal. Thus, for our initial investment of £970, we will receive the following:

£40 coupon payment (our running yield)

£1,000 redemption payment (a £30 profit)

Our return over the twelve month period is £70 on £970, or 7.2%. From the point of view of the private investor, this type of calculation is perfectly adequate for assessing the return on a bond. Known as the simple yield, the formula can be expressed as follows:

(Annual coupon / Market price + (par-market price) / Market price) * 100

Yield to Maturity (YTM)

With longer dated bonds, the same theory applies, but to gain a more accurate measure, we must discount each future cash flow according to when it will be paid. The formula used to calculate this is known as the yield to maturity (YTM) and is effectively the internal rate of return on the investment, allowing for each and every cash flow. The calculation assumes that the company cannot only meet its obligation, but that the interest payments received on the bond can be reinvested at the same rate, although this may not be the case in real life.

The formula for this calculation is somewhat of a handful, and certainly not one for mental arithmetic. For readers who enjoy a challenge, it is:

Price = Coupon * 1/r [1-1/(1+r)n] + Redemption/(1+r)n

YTMs may be calculated by using the YIELDMAT function on Microsoft Excel or on a dedicated financial calculator such as a Hewlett Packard 12C or 17B.

Why does the price of some bonds move more than others?

Using the example of our theoretical 4% bond with 12 months left to run until maturity, a 1% shift in the yield demanded by investors will produce a change in price roughly equivalent to 1%. In the case of a longer dated bond, with many more years to run until redemption, the price move will be considerably more. This relationship between a given change in yield and the resulting change in price is known as the duration of the bond. Duration will have a considerable effect on the volatility of the asset over a range of different interest rate scenarios. Let’s take three UK Gilts as an example (calculations based from December 2006).

Note that the higher the duration of the bond the greater the price move shown per change in yield. Duration is governed by the length of time to maturity and the size of the coupon, in effect, the average period of all cash flows. A long dated bond with a low coupon will have the greatest duration, a short dated bond with a high coupon will have the lowest duration. Investors looking to benefit from falling yields should look to add duration to their bond portfolios, defensive investors, or those envisioning a rising interest rate scenario will look to reduce.

And how about corporate bonds? The relationship between price and yield for a corporate bond is exactly the same as a government bond, and the same yield calculators can be used for both. However, compared to a super-safe government bond, investors will demand an additional return for lending money to corporations due to the  increased risk of default. This premium over the equivalent government bond yield is known as the spread.

Non-government bond spreads vary greatly, with supranational agencies (such as the World Bank) trading at only a tiny fraction over governments while the debt of smaller, risky or unfashionable companies may trade at a level returning several percent or more over a government bond of an equivalent maturity.

Remember, corporate bond spreads reflect the market’s view of the creditworthiness of the issuer. This opinion can change quickly, adding price volatility to this type of bond over and above that determined by interest rate fluctuations.

The yield curve

Both government and corporate bonds are issued in a variety of maturities, ranging from super-short 3-month treasury bills and corporate paper through to 30 year or even undated or “perpetual” bonds with no final maturity.

Interest rates change over time, and bonds of different maturities will have different yields, reflecting the market’s expectations for future interest rates. Generally, investors will require an incremental yield for longer dated securities. This means that long dated bonds generally yield more than short dated bonds. This is known as a “positive yield curve” and is the usual state of play in the markets. If investors expect interest rates to rise in the future, the price of longer dated bonds will fall, pushing up yields at the long end of the curve. This is known as a “steepening” of the yield curve.

Alternatively, the perception of falling rates can lead to an “inverse” yield curve, where investors scramble to lock in fixed rates at the long end, pushing yields down below current money market rates.

If you are new to buying bonds, we have prepared a short guide to the practicalities of dealing in, and owning these instruments.

First… select and identify your bond

Once you have determined which bond or bonds to buy according to your criteria of maturity, credit quality and yield (see Types of Bonds for more on this subject), it is important to correctly identify the security to prevent errors in dealing or other misunderstandings. When dealing in equities this process is usually fairly easy, and most equities will only have one class of share, and one ticker. Not so bonds, and each issuer may have several bonds trading in the market at any given time.  Market convention describes bonds in the following notation: Issuer, coupon, maturity.  Thus, the Tesco bond illustrated below would be described as the "Tesco five point five percent 13th December 2019".

What will the final cost be?

The price that you see on the screen will typically be around 100, perhaps ranging in the 80 to 120 area. This price is expressed as a percentage of the nominal value (i.e. the redemption value) of the bond. This is known as the "clean" price of the bonds and on this basis an investor buying £10,000 of bonds at a price of 99.30 will pay £9,930. However, we must also consider the factor of any accrued interest (see below).

What is accrued interest?

If an investor buys a bond on its first day of issue, or just after the last coupon payment, the price seen on the screen will be the full price. However, when buying a bond half way through its coupon period (for instance 6 months after the last coupon payment for an annual bond), there will be an adjustment for the income that has "accrued" to the bond. This is standard practice in the bond market and strikes a fair balance between buyers and sellers, as well as neatly differentiating between cash flows from income and those from capital gains.

With the majority of non-Gilt bonds, the basis of this accrued interest is calculated on a "30/360" basis. This assumes that each month has 30 days, and each year has 360 days. Thus, let us assume that we are buying £10,000 nominal of the Tesco 5.5% 13 December 2019 as of (31 August 2011). The market price is 112.25p and the trade is for settlement in three business days time.

£10,000 nominal of Tesco 5.5% 13 December 2019 @ 112.25 = £11,225.00

The settlement date is 5 September 2011. Thus, we have to calculate how much accrued interest that we should reimburse the seller for. The bond pays a coupon annually and the last payment was on 13 December 2010.

Period 13 December through to 5 September = 262 days on a 30/360 basis

So, the accrued interest will equal 262 days / 360 days times the annual coupon, times £10,000 nominal, or:

262/360 x 5.5/100 x £10,000 = £400.28

Thus, our contract note will show roughly the following:

Note: The price shown on the screen will not include accrued interest and will be known as the "clean price". The effective price that you pay, including any accrued is known as the “dirty price”.

Accrued interest for Gilts

The Debt Management Office produces a detailed document on calculating the accrued interest on Gilts which can be downloaded in PDF form from their website. This covers the subject in some detail, including the more complex calculations performed on index linked Gilts.

At the risk of oversimplifying the subject, the main variations from the calculation process shown above are as follows:

• Most Gilts pay coupons twice a year (the majority of non Gilts pay annual coupons). The exceptions to this rule are some of the undated bonds such as 2.5% Consuls.
  

• The accrued interest is calculated on “actual/actual” basis, where the true number of calendar days is used to determine the apportionment of the coupon.

Selling your bonds

The best strategy for investing in bonds is typically that of “buy and hold”.  Remember, unlike equities there is no need to sell in order to realise your investment; capital will be returned to you on maturity.

However, from time to time all investors will need to sell a bond in order to raise capital, or perhaps in order to switch into some more tempting investment opportunities elsewhere. In the event of this, bonds can be sold back into the market. Please note that this market price may be higher or lower than your purchase price and this will impact the return that you receive on the investment.

When selling a bond, the accrued interest must also be factored into the calculation. In this case, any unpaid interest will be paid over from the new buyer to the seller, effectively the reverse of the scenario illustrated above. 

Q: I am used to trading equities. Can private investors trade bonds?
A: Yes, but the nature of the instruments makes them better suited to a "buy & hold" strategy. If you are unsure of their suitability please seek advice.

Q: Do I need a lot of money to trade bonds?
A: If you invest in comparatively small sums, the returns may be diminished by dealing cost. Bonds traditionally have minimum investments of £1,000 (nominal), although some bonds can have minimums that are significantly higher.

Q: I own various bonds in my portfolio, why are they not shown on this website?
A: There are thousands of Sterling denominated bonds. Not all of them are liquid and we are unable to display accurate price data for all of them. The bonds displayed are selected by the Bondscape system, based on considerations of quality and liquidity. To deal in bonds not shown on this list, please contact Hargreaves Lansdown.  

Q: Are credit ratings displayed on the website?
A: At present, credit ratings are not displayed on the website.

Q: Can I put bonds in my ISA account?
A: Inland Revenue rules state that in order to be eligible for holding within an ISA, a bond must fulfil the following criteria: Firstly the bond must have a life of five years or more at the time of purchase (without a holder's option for early redemption). Secondly, the bond should be listed on a recognised stock exchange, or the bonds must be issued by a company which is itself listed (or a major subsidiary thereof).

Q: Can I put bonds in my SIPP?
A: Yes, the majority of SIPP schemes allow you to hold bonds. There is no theoretical barrier, however the bond must be listed (note; all the bonds in our "universe" are).  

Q: If I sell my bonds before the coupon pays out, will I miss out on the interest?
A: No, you will receive a pro-rata payment known as the "accrued interest". Conversely, if you buy a bond half way through its coupon period, you will have to compensate the previous holder. This way, the "clean" trade price of the bond is kept separate from the gradual roll-up of interest.  

Q: What about income tax?
A: Income from bonds is paid gross, but is taxable and thus should be recorded on your tax return. If you hold bonds in an ISA or a SIPP, you will be able to benefit from tax free income.  

Q: And capital gains tax?
A: All Gilts are free from CGT. The majority of Sterling bonds are free from capital gains tax, providing that they are "Qualifying Corporate Bonds". Broadly speaking this means most bonds apart from convertibles; however it is best to check if any individual issue is disqualified from this. Note, caution should also be used with low or zero coupon bonds, where the capital gain may be viewed as income.

Q: What does subordinated mean?
A subordinated bond is an issue which carries less seniority in the "pecking order" of the company's balance sheet. When times are good, this will make little difference, but in the event of the issuer hitting hard times, the coupon payment on certain classes of subordinated debt may be waived (see below). Also, if the issuing company is forced into liquidation, subordinated debtholders will only be paid out once senior debt has been repaid (note: sub holders will, however, rank ahead of equity holders). The ranking is as follows (with guidelines of typical features):

• Senior Debt: this is the best
• Lower Tier 2: No coupon deferral. The next best after senior debt.
• Upper Tier 2: Coupon deferral, but cumulative.
• Tier 1: Coupon deferral, non cumulative.
• Preference Share. Generally, coupon payment can be waived, non-cumulative.

Q: Is the yield shown annualised, or to the redemption date?
A: The yield shown is annualised. This means that a 6 month bond showing a yield of 10% will provide a total return of 5%. Likewise, a 10% bond with two years to run will provide a total return of 20%.

Q: Where can I find out the full details of a bond so that I can check its level of security, such as priority ranking, restrictions etc?
A: The full details of a bond are available in the prospectus. These documents can normally be obtained from the Investor Relations department (and often the website) of the issuing company.