Bonds. Are they worth putting money into

[Felstmiester]

Not sure how it all works. Has anyone used this method for investment ??

 

[Deleted member 6183]

You'll need to give some more detail.

Premium bonds, stock market bonds, government bonds, building society bonds and so on.

 

[renault12ts]

Not sure how it all works. Has anyone used this method for investment ??

Yes.

 

[Meldrew2]

Bond? James Bond?

 

[Felstmiester]

Lol. Like I said. I don't really know a great deal about them. If you have a little bit of money sitting in a bank what would be your best bet?

 

[Mr. B]

Lol. Like I said. I don't really know a great deal about them. If you have a little bit of money sitting in a bank what would be your best bet?

Send it to me. I will 'invest' it wisely for you.......honest.

 

[kingdave]

Bonds are sometimes known as 'fixed income' products. The basic idea (some bonds do get more complicated than this) is that if an organisation wants to borrow some money to finance a new venture or something that can sell some bonds.

Here's were you come in, you buy a bond, say for £100 the organisation you bought it from will keep that money for a fixed length of time say 10 years. So that you get something out of the deal they will give you a fixed percentage of the original outlay back at regular intervals, normally either every 6 months or every year. So imagine on the bond you bought for £100 the percentage figure or 'coupon' was 5% here's what money gets paid out.

year 0 - you pay issuer £100 - the 'principal'
year 1 - bond issuer pays you £5
year 2 - bond issuer pays you £5
.
.
.
year 10 - bond issuer pays you £5
year 10 - Since this is the end of the agreement, the bond issuer gives you the original stake of £100 back.

so at the end of the 10 years you end up with £150
The bond issuer had your £100 for 10 years and they were able to buy stock or whatever it is they do to generate income so they had the money to pay you back.

The value of a bond is not fixed over it's lifetime, if the health of the issuer declines their credit rating falls - any bonds they have issued become worth less because there is a higher likely hood they will default or fail to pay coupon payments or the original stake back at the end.

As long as the company issuing the bond doesn't collapse you have a safe investment and interest return regardless of the general state of the economy and the company.

The other main competing class of investment equities (stocks and shares) are not 'fixed income', the amount of interest they give you depends on the amount of money the company you investment makes and how much of that profit they decide to share with their investors. This is why in hard times bonds become a bit more popular.

Hopefully this explanation is helpful?!!!

 

[kth286]

Lol. Like I said. I don't really know a great deal about them. If you have a little bit of money sitting in a bank what would be your best bet?

You would have to quantify 'a little bit'.

Also, you would need to state your objective, for the money.

Also, the timeframe you would be prepared to invest for.

Also, the risk you would be prepared to take.

Also, you would need to assess how that little bit of money fits in with
your overall financial situation - if it was your only buffer of money, would it be wise tying it up; for example.

The above reasons are why financial advisers exist - to help get 'it all
into perspective for you'.

 

[grober]

The other question you have to ask [assuming that you do get the £100 back] after ten years is what is your original £100 bond now worth in purchasing power. In real terms what a currency is worth is what material goods or services you can buy with it. In a situation where a government prints money in the process of quantitative easing the answer is probably a lot less.

 

[kingdave]

The other question you have to ask [assuming that you do get the £100 back] after ten years is what is your original £100 bond now worth in purchasing power. In real terms what a currency is worth is what material goods or services you can buy with it. In a situation where a government prints money in the process of quantitative easing the answer is probably a lot less.

They do get more complex than the vanilla example... You can get inflation/index linked bonds for example.

 

[grober]

They do get more complex than the vanilla example... You can get inflation/index linked bonds for example.

Agreed but depends on how that inflation is calculated and in an era when inflation in the form of CPI appears to be calculated on the price of video games among other things I remain skeptical.
quote:- There are two main measures: the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). These are, in effect, two baskets comprising different goods and services, and different methods are used to calculate them. There are many differences, but the biggest is that RPI includes housing costs such as mortgage interest payments and council tax, whereas CPI does not


Consumer Price Index (United Kingdom) - Wikipedia, the free encyclopedia

Inflation basket of goods 2012: full list of what's out and what's in | News | theguardian.com

BBC News - Economy tracker: Inflation

 

[kingdave]

Absolutely, measuring cost of living is a massive topic. By whatever metric you attempt to capture the change in it, you can successfully argue the formula is wrong, simply because so many goods and services have changed in price in different directions and because no one household buys the same basket.

It's impossible to insulate an investment completely but you can try to hedge the risk of being caught out.

 

[fredT]

I struggle to see how lending out money (buying bonds) will make you any money in the medium/long term in the current climate. Inflation will likely kill you

Edit. I suppose that's a bit simplistic. But you will probably want a fairly high risk bond to be able to keep step with inflation