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Bedale Financial Services
SAVINGS AND INVESTMENTS
FIXED INTEREST PRODUCTS
GILTS (Government stocks)
These are loans to the Government and as such both the interest and the capital are
guaranteed by the Government.
Each loan is issued at a particular rate of interest or can be 'index linked' i.e. both
the rate of interest and the amount of capital are linked to the rate of inflation. You
have to buy gilts in units of £100. Many gilts are 'redeemable' - they will be bought
back for £100 or, if indexed for £100 plus the rate of inflation since they were issued,
on a set date in the future.
Although the interest rate (the coupon) is fixed, so a 5% gilt will pay £5 income each
year, the price of the £100 unit may go up or down after it was bought initially. Many
things will influence this, including the general state of the economy, but current
interest rates will have a big influence. Because, if you have gilts paying 8% interest
when current rates are 4% someone may be prepared to pay nearly £200 for one of
your £100 units, as the rate of return of £8 interest on a capital investment of £200 is
4%.
The FSA does not regulate the sale of, or advice on, gilts.
CORPORATE BONDS
Corporate bonds: these are issued by public companies who want to borrow money
at a fixed rate of interest for a fixed period of time. Euro-sterling
bonds are corporate bonds which are issued in the international
market, rather than just in the UK.
Preference shares: these are shares in public companies which offer a fixed
dividend. They take 'preference' over the ordinary shares of
companies when it comes to paying dividends or distributing
assets if a company is wound up. However, if there is no money to
pay a dividend the preference share holders will not receive one!
These shares may or may not be redeemable at a fixed date and
they may or may not be convertible into ordinary shares at a future
date.
Convertibles:
these are stocks which pay a fixed rate of interest and can be
converted into ordinary shares at some time in the future.
Although these investments offer a fixed rate of return - either an interest rate or a
dividend - the capital value can go up and down; this will depend on interest rates
generally and market's assessment of the value of the company issuing the stock.
2014/YRose/©
Bedale Financial Services
What are the risks?
A corporate bond is only as secure as the company which issued the stock, by
investing through a collective fund you will be spreading your risk across many
companies, but overall performance will be more secure if the investments are in
companies which have good credit ratings.
The financial market place uses two main companies to give credit ratings to
companies. Those with Triple A or Double A ratings are considered to have a very
strong capacity to service debt, i.e. to pay the interest on the stocks that they have
issued.
There is also a risk of capital values being eroded as general interest rates go up
and down. If you buy a fixed interest stock when interest rates are high and then
general rates of interest fall, the value of your stock will rise and similarly, if you buy
fixed interest stocks when rates are low, if general rates of interest rise the capital
value of your stock will fall. In this way the 'running yield' on all stocks, with the
same level of risk, stays about the same. This same principle applies to collective
investments based on corporate bonds, such as unit trusts.
The value of your investment may go down as well as up and past
performance is not necessarily a guide to future performance. It is possible
that you may not get back the full amount that you have invested.
This type of investment should be considered as medium to long term and
should be held for at least 5 years.
Bedale Financial Services is regulated by the FCA for pensions and investment
business only.
This information is based on our understanding of current legislation and Inland Revenue practice.
You should not take any action based on this information without consulting your financial adviser.
2014/YRose/©