There are a number of ways for a government or a company to borrow money, but one way is to issue bonds and offer investors the opportunity to buy these bonds.
A bond is essentially an IOU.
You are making a loan to the government (in the UK these are known as a gilt) or company, for an amount of money you wish to invest, or able to invest, and this will be for a pre-stated number of years. E.g., a 15-year government bond.
The bond has a face value (also known as a par value) this is the value you buy the bond for and this is the amount the bond issuer pays back to you when the bond matures, so at the end of the loan period. You know from the start, exactly how long your money will be tied up for.
The bond market is also known as the fixed income market,as with bond investment there is an annual (sometimes bi-annual, product dependant) amount of interest the bond issuer pays the bondholder, this amount is often referred to as a ‘Coupon’.
So, in summary, bondholders get annual interest, plus their money back at the end of the loan period. Like with all investments, the higher-risk bonds carry agreater risk of default.
An ISA on the other hand is essentially a savings account that allows an individual to save up to £20,000 per year tax free. This can be a Cash ISA or stocks and shares Investment ISA.
Bond v’s Cash ISA v’s Investment ISA
As an investor / saverthere must be three fundamental top linequestions when comparing a bond or ISA that need to be asked before looking more deeply:
1.Is my capital at risk?
With a Cash ISA the answer is your capital is not at risk, with bonds not usually, however there are higher-risk bond products. And Investment ISAs, yes, your capital is at risk.
2.Can I gain instant access to my funds during the term?
With Cash ISAs yes, you can have access, but with bonds and Investment ISAs the funds are held as this is what your fixed annual income is based on.
3.Are these bonds and ISA options tax free?
With both Cash ISAs and Investment ISAs, the savings are tax free up to £20,000 p.a., however, with bonds they are not tax free, and tax may be due on the interest.
What’s the catch of premium finance?
Even though the monthly payments sound manageable– you are paying more for your premium in interest and charges.
Sometimes multiple policies are needed, so aspread over the year payment is simply the best way to afford and budget within the cash flow, however premium finance might not be an option if there is poor credit history. As the full insurance policy amount is being borrowedan insurer may say no if credit has been struggled with in the past.