Real bonds are something quite different. These are used by companies to finance their own businesses, in a similar way to shares. Traditionally, most companies have issued corporate bonds that are available only to big investors and to smaller investors through bond funds. However, there are now many more issues targeted at individual investors, which can be bought in smaller amounts.
Q Who has offered these bonds, and what are the deals?
A Some of the recent popular issues have involved big names. John Lewis issued a bond paying 4.5pc interest before tax plus a further 2pc in gift vouchers. National Grid launched an inflation-linked bond promising to pay an interest rate adjusted for RPI. Places for People Housing Association launched a bond offering a 5pc rate over five years, and Tesco offered 5.2pc over seven years. Now comes the RBS deal, paying 2pc plus inflation (measured by the retail prices index).
Q These rates are much better than I would get in the bank ? why wouldn't I go for them?
A In short, because they are risky. If you invest in a retail bond your money is only as safe as the company you've invested the cash with. The higher interest rates reflect this risk, and so these bonds are only really for you if you see them as an investment. In terms of risk, they sit somewhere between shares and bank deposits. So they won't fall with the market like a share investment will, but if the issuer goes bust you'll lose your money.
Q If these bonds are like shares, does that mean I can buy and sell them?
A That depends on the bond. Some, such as the one from John Lewis, are non-tradable. Many others, such as the new RBS bond, trade on the London Stock Exchange's Order book for Retail Bonds (Orb) trading platform. Orb is still relatively small, but it means you can buy these bonds directly through your stockbroker. This will incur dealing costs. Bonds that are not tradable generally give you your money back at the end of the term and pay interest at set periods during that time.
Q Are bonds a good idea in the current economic environment?
A Yes and no. Traditionally inflation has been the enemy of the bond, because it erodes both the capital and the value of the interest payments. Both National Grid and Royal Bank of Scotland have attempted to address this by launching inflation-linked bonds. Also, if you are investing in a small or medium-size business you have to ask yourself why they have issued bonds. If it is because the banks will no longer lend to them, you may want to question whether the rate you're getting is worth taking on a risk the banks no longer want.
Q What about tax?
A If a retail bond is an alternative to an Isa or other tax-efficient vehicle, remember that your high rate of return will be nibbled away by the taxman. However, you may be able to hold some products in an Isa or Sipp (self-invested personal pension), so check with your financial adviser.
Q They sound attractive to me. Where can I find out more?
A If you want to buy a bond that is traded on the stock market you will need to talk to a stockbroker. Barclays Capital recently became a market maker for Orb, which should improve liquidity on the market.
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