understanding financial jargon
A bond is an 'IOU' issued by a company or a government for a loan from an investor. The bond typically offers a fixed annual interest payment (the yield) and a fixed date for the repayment of the loan. The bond can be traded on the bond market, so the investor does not need to hold the bond to it's maturity date. As a result the price of a bond may rise or fall on the market depending on demand. This means the yield will also rise or fall as a percentage of the current bond price, although the interest payment will always be the same.
For example, A company offers a bond for £1 with an interest payment of 7p giving an initial yield of 7%. If the price of the bond rises to £1.10 then the 7p interest payment means the yield as a percentage falls to 6.36% (7/110). If the bond price falls to 90p the yield rises to 7.78%.
If a bond issuer goes into bankruptcy, bond holders usually have a higher priority over any remaining money from the bankruptcy than other classes of investment such as share holders. However bond holders will still generally rank behind the tax authorities and trade creditors.
What to do if you need more help
If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.
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