www.InvestmentGuide.co.uk
www.InvestmentGuide.co.uk BOND or STOCK
(Also called Corporate Bonds, Global Bonds, Currency Bonds)
Lump sum invested in a stock issued by a company usually
for a fixed term at a fixed interest rate. Eurobonds are often, but not
necessarilly, denominated in a currency other than that of the company which
issues the bond. For instance a UK company might issue a € Euro Eurobond
or a German company might issue a US$ Bond. These stocks are not confined to
Europe and indeed much of the market is from countries whose currencies are not
strong enough to issue stock in their own currency. Some Eurobonds are known as
Junk Bonds where the company issuing them is thought likely to
default.
At the end of the term (the redemption date), the
original value is repaid in full; meanwhile the stock can be bought and sold at
any time at the market price. The yearly return you get, called the net
redemption yield is the after tax interest you receive plus the averaged
out gain (or loss) you expect. The running yield is the return ignoring
any gain or loss. Some stocks will show no gain to redemption as they currently
stand above the nominal value of 100. Indeed many guarantee a hefty loss
if held to redemption. Sometimes a re-organisation can result in the interest
rate being raised or lowered, the stock being repaid early or at a lower or
higher level (see Risk below).
Who can invest Anyone.
How worthwhile Different stocks are good for different rate taxpayers. Compare with Stock Government Fixed Interest and Stock Debenture and Loan. Stock maturing in 10+ years not recommended although these generally have a higher running yield. See also Stock Convertible Loan.
Minimum A portfolio of 7 stocks worth £2,000-£5,000 each. Lower amounts not worthwhile because of minimum commission.
Maximum None.
Suitable Lump sums.
Money back At end of term. Or 5 working days if you sell earlier when you get the market price.
Interest Fixed. About 5 weeks before the interest is paid the stocks go ex-dividend. The seller gets the next interest payment. When you buy a stock (or if you sell before it matures) your contract note giving details of the transaction shows accrued interest as an addition or deduction from what you pay or receive.
Interest paid Half-yearly by cheque or direct to a bank account.
Tax Usually no tax is deducted from the interest. Taxpayers must pay tax later to the Inland Revenue. Any accrued interest is added to your contract note, see Interest above) is liable to income tax. If accrued interest is deducted, you can deduct it from other interest from the stock or claim a tax rebate if applicable. These accrued interest rules don't apply if the nominal value of all your stocks is £5,000 or less, for more details from the taxman, see Accrued Income Scheme. Gains are exempt from capital gains tax.
Fees to pay Stockbrokers commission when you buy varies from ¾% to 1½%; min. £10 to £30. Same when you sell. None if you buy a new issue direct or hold to redemption. Some stockbrokers may charge fees for holding the stocks, either as % of value or at a fixed rate per stock, either yearly or half yearly.
Passbook None. Stock certificate from the company you invest in or statement of ownership from your stockbroker if your shares are held by your stockbroker as nominee. Nominee holdings will increasingly become difficult to avoid under Crest.
Children Under 18 stock must be held in an adult's name but can be designated with the child's initials or name.
Risk If a company goes bust or defaults, you could lose all or part of your money but Eurobond stock holders are paid before ordinary shareholders. Possible capital loss if you sell early. These stocks tend to fall in value when interest rates rise and vice-versa. There is also a currency risk if the stock is held in a curency other than your own; this can lead to a loss or a gain.
How to invest Ask a stockbroker which stock with a reasonable credit rating has the best net redemption yield for your tax rate and the time you want to invest for. Check they think the company is likely to stay in business until your stock matures. You can invest through a unit trust specialising in this type of investment.
Where from A stockbroker.
Last updated 14
January 2012.