Bonds… So what exactly is a Bond?
A bond is a fixed income investment in which an individual loans money to an entity for a fixed return over a predefined term.The entity( which can be both government or private) borrows the money at a rate of interest(variable or fixed).
Bonds are a way for Government or private companies to raise money for whatever their needs may be. The Bond issuer is in debt to the investor who lent out the money.
Bonds are plagued with several issues such as time, economic atmosphere, inflation, the interest rate and the bond issuer.
So what are the risks of Bonds?
Bonds which have a longer term such as 20 years have a greater risk of default depending on which way you look at it. Some may say they have a greater chance of repaying the bond but the longer someone owes you the less likely you are to receive your initial capital plus interest.Bonds with a higher term will usually pay a higher interest rate to compensate for the increased risk of the bond issuer defaults.
Inflation also plays a big part in determining how risky a bond is.Inflation can very easily rise and eat away at any interest gained from a bond. Inflation really means a general increase in prices of common household goods and a fall in the value of money. So, when inflation rises, this means your money is worth less than it was when you initially purchased the bond.
The economic atmosphere can also play a big role in the risk rating of bonds. Bonds issued at a good economic time can then find that the bond issuer is operating in a market with a bad economic atmosphere a few years after the bond issue. This reduces their income and raises the debts of the bond issuer in a scenario where revenue is slowing due to fewer sales and the cost of borrowing increasing or further debts are being taken on in a bid to survive the economic downturn.You can see how time now plays a factor in the likelihood of a bond issuer defaulting in correlation with an increased bond term.This is simply because there is no accurate view of economic forecast and things can turn for the worse at any time.
Bonds don't always work out as they should, sometimes companies go bust and their debts remain unpaid or settled, but at a discount.The good thing, of course, is that the likelihood of not being paid back or the risk associated with the bond will reflect on its price and hence the interest rates offered to investors.
Liquidity is, of course, a big problem and no market currently exists for the trading of bonds in private companies. This means you might find it hard to liquidate your investment.
You can have a look at credit agencies who rate bonds but do not rely on this as your sole criteria for investing.
What should you be optimistic about?
A fall in inflation will greatly increase the value of your bonds as the interest generated is now worth substantially more in real spending terms than when you bought the bond.Your bond can be sold on the market at a premium.
A fall in interest rates if you are on a fixed bond. Interest rates will usually fall when the government tries to implement monetary policy to reduce the cost of borrowing in order to boost consumer sending or make it cheaper for business to borrow. This will usually lead to inflation as too much money enters the economy.
A rise in interest rates if you are on a variable bond.Interest rates will usually rise in good times of economic prosperity due to increased demand for credit from shoppers and businesses.Interest rate rises are also implemented through monetary policy as a way of reducing inflation.
Interest rates on corporate bonds will usually be bigger than those on government bonds to reflect the risk of relying on an entity who can generate funds through tax receipts or one who has to wait for revenue to come in through consumers.
Some bonds are also indexed and the interest generated from them will rise in line with inflation.These are a good option but don't expect the interest rates offered on these to be great.
Quantitative easing is a process where the Government buys Corporate and government bonds as a way of injecting money into the economy.This increase in demand can raise the prices of your bond significantly and earn you a good profit if sold.
So what platforms are out there to invest in bonds?
WiseAlpha is a pioneer in the corporate bond, unsecured and secured corporate loan market for as little as £100. They offer an average annual interest of 8%. The investments on WiseAlpha were not available to retail investments at this minimum investment, with the minimum investment usually being around the £100,000 mark.
WiseAlpha purchases the Bond or loan and allows the retail market to participate by buying parts of the bond or loan through participation notes.As interest payments are paid by the borrowers, WiseAlpha pays the investors (You) after fees.
You can exit your investment by selling your bond or loan to another WiseAlpha investor. This is, however, dependant on market liquidity and there is no guarantee you will get what you paid for or market price.
Interest earned from your WiseAlpha investments are subject to corporate and personal tax so be sure to check with your tax advisor so you are fully compliant with your tax obligations.
The platform is user-friendly and the WiseAlpha team are always there to help.
WiseAlpha is FCA authorized however your investments are not covered by the financial services compensation scheme.
What products can you access on WIseAlpha?
Senior Secured Bonds:
This is essentially a debt security issued by a Government or Company. This product pays interest every 6 months and is offered at a fixed rate. The capital is then paid back on maturity or earlier.
Senior Secured Loans:
This is when a company takes out a loan from a bank which is then syndicated amongst a group of lenders. Interest rates are usually a floating rate. E.g 5% + LIBOR. The interest rate changes in line with LIBOR.The capital is then paid back on maturity or earlier.
High Yield Unsecured Bonds:
A company takes out an unsecured bond from a syndicate of lenders. This is then sold on the international markets by the investment banks. The term for this products usually ranges between 7 and 10 years. Capital is paid back at maturity or earlier but an early repayment charge is due if paid earlier.
So what fees does WiseAlpha charge?
WiseAlpha charges a 1% annual fee on all investments held. It also charges a 0.25% sale fee on the principal sold.
The next platform offering retail investors access to the Bond market is of course Downingcrowd. Downingcrowd is the P2P am of Downling LLP. Downingcrowd offers a better proposition than Alphawise as it allows investors to buy bonds under the Innovative Finance ISA tax wrapper. This means you will not be liable for any tax on any interest or capital gains. Your annual tax allowance still applies and your funds are not covered by the financial services compensation scheme.However, funds held in client money accounts prior to investing are still covered by the FSCS for up to £85,000 and in some cases, Downingcrowd may pay up to £50,000 compensation if instructed by the FCA where Downingcrowd is unable or unlikely to honor legally enforceable obligations.
With Downingcrowd you can choose the specific Bond products you want to invest in and with average interest rates of 6.15% per annum you might consider Downingcrowd less competitive to the WiseAlpha platform.
All firms listed on the platform have undergone due diligence by Downingcrowd. At the time of our review, we did note that there were a few Downing LLP subsidiaries or firms related to them on the platform. Conflict of interest I hear you mutter?
At the time of writing Downingcrowd has so far raised over £52m from investors and repaid over £18m of capital with £1.4m of interest being returned to investors and 0 bad debt.
So what fees does Downingcrowd charge?
It wasn't possible to get an idea of Downingcrowds fees from their website.You should contact them for up to date pricing before investing. Downingcrowd offers a contingency charging model where they only charge investors getting their capital and interest back.
Our final platform Wellesley is an alternative finance property firm which provides loans to home builders. Wellesley offers a property mini bond which allows investors direct access to the asset backed loans made by Wellesley. There is no financial services compensation scheme in place and your CAPITAL IS AT RISK.
The bonds are used to loan out funds to borrowers and thee funds are spread out proportionally amongst borrowers and hence reducing the risk through diversification. Wellesley also charges no investor fees as the borrowers are charged for the cost of the service.
You can choose to receive you interest payments monthly or at maturity. The bonds however will most likely have some tax implications as they are not held in a Tax wrapper in contrast to those at Downingcrowd.
Investors can receive an interest rate of 6% per annum based on the term of the bond they invest in.
At the time of writing, Wellesley claim to have paid over £18m back to investors as interest and made over £640m worth of loans.
Remember, this is not financial advice folks.
Past performance is not an indication of future performance. You should not rely on past performance as a guarantee of future investment performance.