Investment Bonds versus Other Investments

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cash moneyThe London Stock Exchange’s Order Book for Retail Bonds (ORB) was launched in February 2010 in order to provide private investors with easier access to tradable bonds. It’s deemed a transparent, efficient and cost-effective platform – across a wide range of UK fixed income securities.

Companies that want to raise funding issue bonds which can be bought directly by the investor, allowing the company concerned to borrow the funds for a defined period of time, at a specified rate of interest. This is an attractive option for the company issuing the bonds as it represents a great way of raising finance without having to sell equity.

For the investor, retail bonds offer significant returns, which are rarely available through conventional methods of saving, and they come with few of the risks associated with dealing in shares. This means that retail bonds are an attractive option for both issuers and investors and, consequently, they have been good for the London Stock Exchange (LSE).

The minimum amount invested in bonds can be quite modest (in some cases as low as £100, but more typically £1000). Investors earn interest on the bonds until the maturity date, when the initial investment is returned to the investor. Some retail bonds are tradable on the LSE’s bond retail market. Other bonds, such as Energy Bonds, are however not tradable on this market – but they usually offer higher returns.

A major advantage when buying retail bonds is that investors can buy direct, saving the sums paid to a ‘middle man’ bond fund manager, and thereby boosting returns. Professional fund managers do of course have more experience in the bond market and understand these associated risks. In buying bonds you are actually buying company debt, and there are some risks involved. The return on investment depends on the issuing company honouring its obligation to pay the bondholders, and there is no protection under the UK’s Financial Services Compensation Scheme if the bond issuer doesn’t return the capital invested. Investors are advised to find out whether the bond debt is secured, and if it is, what assets the bond is secured against. The question investors should ask is ‘where do I stand in the queue of creditors should the issuing company go bust?’

With the fixed interest payments offered on some retail bonds, and the fact that some of the bonds must be held until the maturity date, investors should consider whether the high interest rate will still be an attractive option should inflation begin to rise again.

While retail bonds don’t hold the same risks as investing in shares, neither do they offer the same potential rewards. Because the investor is loaning money to a company (the bond issuer) there is no prospect of capital growth One of the sectors to offer retail bonds is the renewable energy sector – and these bonds are not just attractive to ethical investors, but to investors who are looking to reduce the risks associated with some other retail bonds. Renewable energy installations are generally low maintenance and cost little to operate, so an attractive return on investment is much more achievable. Energy Bonds are used by renewable energy companies in order to install equipment such as solar panels or wind turbines, which not only receive revenue from generating electricity, but also benefit from the government incentive known as a Feed-in Tariff.

[This post is supported by Energy Bonds. Image: Tracy O]

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