However, even the supposedly ‘safest’ bonds can Understanding experience meaningful price movements as factors such as interest rates and inflation have a significant bond yields impact on prices. Corporate bonds Corporate bonds generally offer a higher income than government bonds as they are perceived to be riskier investments. However, there is, as with government Bond coupons and bond yields are two different things. bonds, also a hierarchy of risk/return potential within Coupons are usually fixed, while yields vary. The yield the corporate bond sector. Investors can identify those is calculated by dividing the coupon by the price of the firms that present potentially greater credit risk by bond, and since prices can move, yields also change. the credit ratings given to companies by independent For example, if the UK government issues a bond at £100 ratings agencies. with a 5% coupon, the coupon payment will always be Investment grade bonds are issued by firms that £5. At issue price, or ‘par value’, the yield is also 5%. If are believed to be in a comparatively stable financial the price of the bond falls to £90, the coupon is still £5, but position. These bonds are generally considered to be the yield rises to 5.5%. On the other hand, if the price rises relatively safe investments with less credit risk, and to £110, the coupon is still £5, but the yield falls to 4.5%. therefore have a higher credit rating and usually offer a This is why, if you need a certain level of income, the price lower level of income. you pay for a bond is important as well as the coupon. High yield bonds are issued by firms that are perceived Government bonds to have low credit quality. They are so-called because Government bonds are generally considered some of the they offer particularly high levels of income due to the safest types of investment. However, the risk and reward fact that they are believed to be less financially secure. potential of government bonds varies across issuing Investors who are willing to lend money to these riskier countries according to the stability of their governments companies may be offered very attractive real returns. and economies. Investors should be able to identify those The high yields are offered in part to compensate governments that present potentially greater credit investors for the potentially greater risk that these risk by looking at the credit ratings given to different issuers may not make their interest payments or repay countries by independent credit ratings agencies. their loans. Governments that are considered to have a low chance of default (inability to make interest payments or repay The value of investments will fluctuate, which the initial loan) will generally offer lower levels of income will cause fund prices to fall as well as rise and from their bonds than those where the chance of default you may not get back the original amount is believed to be higher. you invested. 9