What Is a Retail Bond and Is It Suitable For Me?
Bull Itch (Photo credit: emilio labrador)
With traditional savings accounts continuing to offer paltry interest rates, people are increasingly looking for other ways to get a better return on their money. Investment opportunities such as retail bonds are becoming more commonplace. But what are they and who are they suitable for?
From Institutions to Individuals
Bond launches have traditionally been reserved for large institutional investors, with individuals buying funds of corporate bonds rather than those relating to a specific company.
Retail investors have now got in on the act and it is possible to buy bonds relating to individual organisations. Companies such as Tesco, National Grid and Eddie Stobart and charities such as Scope and the housing arm of Mencap are all using retail bonds to raise funds.
These bonds are being used as a way of raising capital at a time when it is harder to borrow money through more traditional banking routes.
An Attractive Opportunity
A Retail Bond is effectively an IOU. When you buy one, you are buying a promise from the organisation that it will return your capital at the end of a set period and pay you a fixed level of annual interest in the meantime. The key attraction of these bonds is the rate of return that they promise, with between 4% and 6% quite common.
A Cautionary Tale
However, these are longer-term investments and whilst the interest rates offered by the bonds may look attractive at the moment, if inflation starts to rise again then the return will not be quite as rosy.
Additionally, retail bonds are not risk-free so are not suitable for those looking to put their money in a guaranteed safe place. The higher interest rates offered for retail bonds reflect the higher level of risk. Whilst some bonds are backed by assets, others are unsecured. Effectively, the company could go out of business and you would have no recourse to the Financial Services Compensation Scheme.
There is also no prospect of capital growth for your investment and their value can be volatile. There is less liquidity in the bond market so it can be harder to buy and sell bonds, particularly those relating to smaller companies. Not all of them can be traded.
Finding the most appropriate bond can also be difficult. Many companies offer a variety of different bonds with different interest rates and time periods. A sizeable minimum investment is usually required, often in the region of £2,000.
You will need to use the services of a broker authorised to issue the bonds you are interested in. As well as commission, you may need to pay ongoing fees.
More and more companies are offering retail bonds and they are attractive to individual investors who are looking for a better return than can be found with traditional savings products. If you are looking to invest in them, however, it is essential to do your homework, make sure that you are comfortable with the risks and find the most appropriate bond for you.
Katherine Sharp writes about financial products for a range of consumer websites and blogs. She is particularly interested in market innovations such as the Retail Bond.
Category: Investing
