What are Government and Corporate Bonds?

Bonds are a way for a Government or a Company to borrow money from Investors.

If a Government or a Company needs to borrow large amounts of money they can sell Bonds. These are basically IOUs that you receive interest on. If you buy a 2 year Bond, at the end of the 2 years they will give you all your money back, and also some Interest on top to encourage you to lend them the money.

So image your neighbour Suzy wants to expand her growing Lemonade business. She wants to open a new shop and buy some more equipment. Instead of going to a Bank or other lender, she decides to sell some Bonds to her neighbours.

She thinks she will need to borrow the money for 1 year before she can earn enough to pay it all back, and she will need to raise £10,000. So she creates 10 Bonds, each worth £1,000 and she promises to pay you an extra £100 per year to make it worth your while. This means that that the Bonds have a 10% Yield (£100 is 10% of £1000 per year).

You trust Suzy and have seen her business grow so you are happy to buy one of her Bonds, especially as you know in 1 years’ time you will get your original £1,000 back, plus and additional £100 in Interest!

This is also how Governments raise money when they need to borrow, they will sell Bonds to large investors like Pension funds. Government bonds are generally thought to be safe, so they typically have a low Yield.

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