How does saving with bonds work?

Most of us go through life with little or no savings. Perhaps we manage to scrap together a couple of thousand from our monthly wages over a period of a few years, which will be enough to help the children get their first car or go to university. Some people, however, are lucky enough to come into a larger sum of money perhaps due to the death of a relative, the sale of some property or even a lottery win. There are many ways to invest a sizeable amount of money. Saving with bonds is one of the ways to do it.

If a traditional savings account isn't your cup of tea, bonds can be an interesting, but sometimes unpredictable, way to store funds. A bond is where you give a certain amount of money to invest in either a company or the government. This money will then be used to run the company or government and after a certain period of time the money is paid back to you with an agreed amount of interest.

Corporate bonds are bought and sold on the stock market. They are issued by companies to invest and potentially raise money. Many people think corporate bonds are too risky as companies can collapse whereas this is unlikely to happen to the government. However, corporate bonds usually have a greater rate of interest than government bonds.

A redemption date (or maturity date) is the time when the sum will be returned to the investor, although people who choose this type of savings method can be paid a stated interest rate annually.

Government bonds, however, do not provide a guarantee that all capital will be returned to the investor. In the UK government bonds are often referred to as Gilts. This comes from the debt securities issued by the Bank of England, which had a gilt edge. Issued by the government, they pay a fixed amount of interest twice yearly.

Lastly, bond funds are a type of saving that involves your money being put into different types of bonds, which means different maturity dates and rates of interest apply.

If you want to know more about bond saving why not ask AnswerBank Business and Finance.