How bonds offer an alternative for investors
Published 14/10/2010 | 05:00
WITH bank deposit rates at very low levels and Irish government bonds paying over 6pc, a lot of people are looking at the option of purchasing bonds for investment purposes.
A bond is simply a loan an investor gives to the issuer of the bond. In return, the investor receives a rate of interest (the coupon) and a guarantee that the investment will be returned after a set period has elapsed.
There are two types of bonds -- sovereign and corporate. A sovereign bond is issued by a sovereign state and a corporate bond by a company.
Every bond carries a rating that determines the likelihood of the issuer defaulting on the loan.
Sovereign bonds carry the highest ratings as they are backed by governments. The ratings on corporate bonds depend on the strength of the company. Bonds are usually bought and sold through stockbrokers, who may impose a minimum transaction amount and fee.
While bonds offer a capital guarantee, this only applies at maturity date. Prior to that date, the capital value can rise and fall.
The interest on a bond is subject to income tax rather than DIRT (deposit interest retention tax), so a higher tax payer will pay 41pc, whereas someone on the standard rate will only have a 20pc liability.