The different types of bonds continued Bond issuers are normally graded according to their ability to repay their debt. Investment grade bonds A company or government with a high credit rating is While the majority of bonds that are issued pay a fixed considered to be ‘investment grade’. This means you’re level of interest, there are others that pay a flexible rate, less likely to lose money on their bonds, but you’ll probably or adjust their payments in line with inflation. get less interest as well. Index-linked bonds High yield bonds As we mentioned on page 5, inflation can be a real At the other end of the spectrum, a company or problem for bond investors. One possible solution for government with a low credit rating is considered to be investors worried about changes in the inflation rate is index-linked bonds. ‘high yield’. As the company or government issuing them offered by has a higher risk of failing to meet their repayments, The value of the loan and the regular income payments they have to offer a higher level of interest to encourage you receive are adjusted in line with a particular measure people to buy their bonds. of inflation (in the UK, this is usually the Retail Prices Index). This means that when inflation is rising, your coupon payments and the amount you get back will go up in line with the inflation rate, and vice versa. 9