When you invest in bonds, you lend money to governments Income from fixed and companies They agree to pay you interest, plus the original amount back at the income end of the loan This means there is the potential for a stable income, but the borrower may fail to keep up with repayments Fixed income, or bond, investments are loans made The chance of a loss by investors to governments (government bonds) or While income payments are fixed, the price of the bond companies (corporate bonds) seeking to raise money can go up or down as bonds are traded in the marketplace, by issuing debt securities. The borrower makes interest although over the long term, prices tend not to fluctuate payments to the investors in the form of ‘coupons’, as much as company share prices. Therefore, it is possible and pays the original investment back at the end of the to make a profit on a bond and achieve some capital term of the loan (‘maturity’), which can vary from a few growth. However, it is also possible to make a loss. Because months to many years. bond prices can move, the value of your investment can What is a coupon? also change as the return on the bond (also referred to as Coupon payments mean that you could receive a stable, the yield) can vary. regular income. If the coupon is fixed, you will generally know the exact amount of income you will receive, and when it will be paid. This can make it easier to plan ahead. Income: coupons Fixed coupon investments offer little scope for income You often know exactly how growth, however, and may not have the potential to keep much you will receive, assuming pace with inflation. Some bonds are index-linked, which the issuer doesn’t miss payments. means the coupon will be adjusted over time to provide some protection for your income against inflation. Capital return Different levels of risk If you buy a bond from another It is important to remember that bonds are not ‘risk-free’. investor for less than its original There is always the risk that the government or company cost, you could make a profit by you have lent to will fail to keep up with payments. The holding it to maturity. higher the perceived potential for this to happen, the higher the income payment you will usually be offered. 8