Bonds can be issued by corporations (corporate bonds) and governments (government bonds).  Generally, bonds tend to be lower risk than stocks and shares, and government bonds tend to be lower risk than corporate bonds.  Linked to being a lower risk, they therefore have lower potential returns.

In simple terms, a bond is a loan - you are the lender and the corporation or government that is issuing the bond is the borrower.  As with a normal loan, the borrower pays the lender (you) the loan back with interest.  As you know how much interest you will receive, bonds are known as fixed income securities.  Over the life of the bond, you will be paid back in full (plus interest) by a payment at maturity and regular interest payments - the conditions of the bond will be clear.  The risks is that the bond issuer won't pay back the loan (and this risk tends to be higher with a corporation than with a stable government).

Corporate bonds give companies an opportunity to raise more funds than they would be able to through a bank to improve their business.  Government bonds are referred to as gilts - they provide a means for governments to finance public spending by borrowing money.

You can invest in corporate bonds by:

• Investing directly through the third party who is underwriting the issuance of the bonds.  The third party (such as a bank) has bought the bonds from the issuer and is then selling them to others.  The initial investment for this tends to be quite large, so may not be feasible if you do not have a significant amount to invest.
• Buy shares in a corporate bond fund.  However, be aware that the fund will not provide payments in the manner described above.  The value of the fund will fluctuate in line with the value of the bonds it has invested in, so you are not guaranteed to make money on the investment.

You can invest in UK government bonds / gilts by:

• Buying directly from the Debt Management Office (DMO).
• Through an authorised agent.
• Buy shares in a fund that has invests in government bonds.  As above, the value of the fund will fluctuate in line with the value of the bonds it has invested in, so you are not guaranteed to make money on the investment.

For a more comprehensive explanation of corporate and government bonds, follow the links below, or search online: