One of the questions we are often asked by our investors is “what other types of bonds are there?” For example, Propiteer Capital PLC offers a corporate bond, which is backed by the security of an asset in the property sector. However, there are many other types of bonds for us to discuss, and we go into some of the bonds available to investors below.

What is an investment bond?

Typically offering mid to long-term financial growth, an investment bond is a lending system whereby an investor lends a lump sum to a company that is raising funds for a particular project. In exchange, the borrower issues a legally binding bond certificate to confirm and secure the investment. Dividends are normally paid by the borrower in the form of fixed-rate returns either at the end of the agreed term or once the bond matures.

Investment bonds can be purchased either directly through the borrower (this can include small businesses, corporate companies, and government bodies), your life insurance provider, or a financial adviser.

Bonds undergo a rating method to highlight their level of stability, like a credit rating. A bond rating gives investors an idea of how financially viable a bond might be and how likely the interest rate is to be met. Bonds are rated alphabetically, similar to school exam grades. The highest bond rating is AAA such as UK Government bonds or Gilts. Unrated or C and below may be considered more volatile however they give a greater potential return.

Investment bonds vs shares

When buying company shares or stocks, this means that you have equity. In other words, you become a co-owner of a company or business as a result of your investment. Bonds, on the other hand, don’t offer equity. Through buying bonds, investors are effectively creditors (bank replacement) to borrowers. Once the intended project has been funded and completed, investors receive their money back with interest without any equity.  

Types of investment bonds

There are two key types of investment bonds: onshore and offshore, which mainly differ in terms of tax laws. However, there are other bond types than can often come into the mix if you’re researching the most suitable type of investment bond for you.

·         Onshore bonds

This term refers to bonds issued by companies in the UK, meaning that they are subject to certain tax rules such as income and capital gains tax.

·         Offshore bonds

Offshore bonds are issued by companies outside of the UK. These can be a tax-efficient way of investing in bonds as dividends are free of certain UK taxes. Funds are only subject to taxes if they are transferred to the UK. 

·         Government bonds

Sometimes known as ‘gilts’, government bonds are issued by government agencies to raise funds. This bond type can offer a high bond rating due to the government backing.

·         Corporate bonds

These bonds are issued to investors by a company. Capital is gained from investor funds and investors are re-paid thorough interest (either fixed or variable, and either at the end of the pre-agreed term or at bond maturity).

·         Savings bonds

Offered by banks and building societies, savings bonds require investors to lock money away for a set period. Funds can’t be access during this time, but this allows for fixed interest to build. Generally, the longer the commitment, the higher the rate.

·         Guaranteed equity bonds (GEBs)

This is a way of investing in the stock market through bonds. With GEBs, bonds offer security against your investment if the market falls. 

·         Insurance bonds

A common long-term investment type in the UK, insurance bonds are offered by life insurance providers. Investments are pooled together and invested into various assets and dividends are normally paid back regularly or as bonus payments.  

·         Business savings bonds

Companies can invest in business savings bonds to receive a fixed-rate returns. These bonds usually require businesses to commit to locking money away for the term period of the bond.

·         Junk bonds

Junk bonds are often offered by companies with some form of financial struggle. These bonds are referred to as ‘junk’ due to their lower credit rating, which is typically below the investment standard. The risk associated with junk bonds also tends to be higher compared to standard corporate bonds due to the lack of investment security as a result of the company’s financial situation.

·         Social impact bonds (SIBs)

SIBs are used by the government to deliver social services or projects with financing from investors. This is normally carried out by charities. Investors can be paid from the savings made from a project or based on how a project performs.  

·         Ethical bonds

For investors who are conscious of funding a cause that’s important to them, organisations such as banks and companies will offer investment bonds based on a certain criteria to benefit an ethical issue. This can include environmental or social causes, for example.

·         Tracker bonds

Also known as index funds, tracker bonds are investments which are tracked against a market index, so your funds rise or fall in value based on the movement of the market index.

·         Index-linked bonds (ILBs)

The intention of an IBL is to protect investor income from inflation through linking bonds to an inflation index, which in the UK is the Retail Price Index (RPI).

·         Floating rate bonds

Often referred to as Floating-rate Notes (FRNs), this bond type with variable interest rates, which fluctuate with inflation.

Taxation of investment bonds

Depending on the bond type and agreed terms, there are certain events which may make you liable to certain types of tax. Making withdrawals from a bond may involve having to pay income tax, which is a charge for the income made through gained interest. Capital gains tax is a different form of taxation, which may incur when you sell an investment bond at an increased value.

In the UK, bondholders are entitled to a 5% tax deferred allowance, meaning that investors can withdraw up to 5% of the invested amount each policy year without being liable to tax charges.

Outside of the 5% allowance, taxation laws come into play when money is taken out of a bond. This is often known as a ‘chargeable event’. A chargeable event may be triggered by:

·         Withdrawals of more than the 5% tax-free allowance

·         Assignment transfers of the bond between legal holders

·         Death of the bondholder

·         Cashing in on a bond before the agreed term time is reached

Pros and cons of investment bonds

Each type of bond comes with its benefits and challenges, like all investment methods. The question of whether the pros are outweighed by the cons is a subjective matter and will depend on a series of factors such as your investment goals, your available funds, and your time horizon.

Some of the key advantages and disadvantages of investment bonds include:

Pros	Cons
Can offer more predictable returns via fixed rates	Can involve locking money away for long periods
Can offer more financially viable rates than banks	Can be complex to understand
Diversification opportunities	Profitability can fall with market changes
Tax-efficient options	Can be subject to certain taxes and withdrawal penalty charges

Investment bonds do have their place and can offer attractive rewards if approached correctly and by the right type of investor, but with so many types of bonds on the market, it can be tricky to gauge their potential and how they could benefit your financial aims. If you’re unsure about where to start or how to evaluate investment bonds and their upsides and downsides, it is always recommended to seek expert financial advice before making any commitments to ensure that the bond meets your expectations on profitability and timescale, and that you determine your risk profile.  

Key takeaways

·         An investment bond is a way for investors to lend money to a company to help fund a specific project. Profits can be gained through fixed-rate returns.

·         There are numerous types of investments bonds such as onshore and offshore, corporate, and insurance.

·         Bondholders are entitled to a 5% tax deferred allowance in the UK, outside of which there may be tax payments involved on withdrawals and profits.

·         Advantages of investment bonds can include diversification opportunities and tax-efficient options.

·         Disadvantages of investment bonds can include their complexity and potential penalty charges.

·         It is recommended to speak to a financial adviser before getting started with investment bonds

How to invest in bonds

At Propiteer Capital, we finance high-quality real estate developments in popular locations across the UK and Ireland, which enable us to service various property demands on a nationwide level. We offer a convenient way of investing in a diverse portfolio of desirable assets through fixed-rate bonds with simple investment plans to easily grow your money with a range of monthly and annual term times, and fixed-rate profits of up to 9.0%.

Our investment products cover the following asset classes:

1. Residential Rentals

Purpose-built quality living units in popular locations.

2. Branded Hotels

In partnerships with Hilton and Marriott International, these are ultra-efficient, focused service hotel facilities in high-demand locations.

3. Development Properties

A build-to-sell model, which spans the UK’s most robust locations. Each project is completed and sold to release development profits.

For more information on Propiteer Capital and to learn more about our investment bonds and portfolio, visit our website.  

Rates are accurate at the date of publishing. For our latest rates, please visit our homepage.

Recommended Read: Pros and Cons of Corporate Bonds