Education

Bonds have now been made more easily accessible for the private investor with the London Stock Exchange's Order book for Retail Bonds. This revolutionary new trading service will allow private investors the opportuntity to see two way prices on screen and trade in a select number of corporate bonds and UK government gilts just as they currently do for shares. This page is dedicated to providing information to private investors on bonds, the new trading service and how to access the order book.

What are bonds?

Bonds are tradeable securities, issued by a borrower (the bond issuer) in order to raise capital. Bonds represent a formal agreement between the issuer and the lender (the bondholder) that the issuer will repay to the lender the full amount borrowed plus interest over the lifetime of the bond.

Bond Basics

In order to understand the basics of bonds we need to understand some of the bond terminology:

The Principal - also known as the 'nominal value' or 'par value' of a bond is the amount that the borrower, the bond issuer, will pay to the bond holder on maturity. The principal is also the amount on which the interest is paid to the bondholder.

The Maturity Date - also known as the redemption date of a bond, the date on which the issuer agrees to pay back the principal amount of the bond.

Coupon Rate - is the annual interest rate paid on the bonds and is the rate used to determine the amount of interest the borrower pays to the bondholder at regular intervals throughout the lifetime of the bond.

Example 1: Government Bond - Treasury 4% 2016

UK gilts have a semi-annual coupon cycle, the interest on those bonds would be paid in two installments each year. If the bondholder has a total nominal value of £5,000 held in gilts , this would generate two coupon payments each of £100 to be paid at six-monthly intervals until the gilt was redeemed in 2016.

Example 2: Corporate Bond - RBS 5.1% NTS 01/02/20

Similar to the example above, however as is commonly the case with corporate bonds they usually have an annual coupon cycle. If the bondholder has £10,000 nominal of these particular RBS notes, then they would receive a single payment of £510 each year.

More information on bonds and the new trading service can be found in the downloads section.