Bonds are one of the most popular asset classes, yet many beginner investors don’t understand them. Here’s everything you need to know.
What Is a Bond?
A bond is essentially a loan you make to a government or company. In exchange, they pay you interest (the coupon) and return your principal when the bond matures.
| Term | Definition |
|---|---|
| Face value | Amount you lend (£1,000 per bond) |
| Coupon | Interest rate paid (e.g., 5% = £50/year) |
| Maturity | Date when principal is repaid |
| Yield | Effective return based on price paid |
| Credit rating | Risk assessment (AAA = safest) |
Types of Bonds
Government Bonds (Gilts, Treasuries, Bunds)
Issued by national governments. Considered very low risk.
| Country | Bond Name | Typical Yield (2026) |
|---|---|---|
| UK | Gilts | 4.0–4.5% |
| US | Treasuries | 4.25–4.75% |
| Germany | Bunds | 2.5–3.0% |
| Japan | JGBs | 0.5–1.0% |
Corporate Bonds
Issued by companies. Higher risk = higher yield.
| Rating | Risk Level | Typical Yield |
|---|---|---|
| AAA (Apple, Microsoft) | Very low | 3.5–4.5% |
| BBB (stable companies) | Moderate | 4.5–6.0% |
| BB (below investment grade) | Speculative | 6–8% |
| CCC (distressed) | High risk | 10–15%+ |
High-Yield Bonds (Junk Bonds)
Bonds rated BB and below. Higher risk of default, but potential for much higher returns.
How Bond Prices Work
Bond prices and yields move in opposite directions.
When interest rates RISE, existing bond prices FALL (because new bonds pay higher rates).
When interest rates FALL, existing bond prices RISE.
Example: You buy a 5-year bond paying 4%. If rates rise to 5%, your bond is less attractive. Its price drops so that its effective yield matches 5%.
This is called interest rate risk.
Bond Duration
Duration measures how sensitive a bond is to interest rate changes.
| Duration | Price Change per 1% Rate Change |
|---|---|
| 1 year | ~1% |
| 5 years | ~5% |
| 10 years | ~10% |
| 20 years | ~20% |
Short-duration bonds are less sensitive to rate changes. Long-duration bonds are more sensitive.
How to Invest in Bonds
| Method | What It Is | Min Investment |
|---|---|---|
| Individual bonds | Buy bonds directly | £1,000+ per bond |
| Bond ETFs | Basket of bonds, traded like stocks | £1 (fractional shares) |
| Bond funds | Actively managed by professionals | £500+ |
| Savings bonds | National Savings (UK) Premium Bonds | £25 |
For most beginners, bond ETFs are the easiest option.
Popular Bond ETFs
| ETF | Type | Yield | TER |
|---|---|---|---|
| iShares £ Gilts UCITS | UK government | 4.1% | 0.07% |
| Vanguard Global Bond Index | Global government | 3.5% | 0.10% |
| iShares $ Treasury Bond | US government | 4.3% | 0.07% |
| iShares Corporate Bond Index | Investment-grade corporate | 4.8% | 0.12% |
Building a Bond Portfolio
| Age | Bond Allocation (sample) | Reasoning |
|---|---|---|
| 20–30 | 0–10% | Focus on growth |
| 30–40 | 10–20% | Add stability |
| 40–50 | 20–40% | Increase income |
| 50–60 | 40–60% | Preserve capital |
| 60+ | 50–70% | Income + safety |
Bottom Line
Bonds provide income, stability, and diversification. They’re not as exciting as stocks or crypto, but they play a crucial role in any balanced portfolio. Start with bond ETFs, match the duration to your timeframe, and reinvest the interest to compound returns over time.