Bonds are issued by companies and governments when they want to borrow money. The issuing company then pays interest on the money borrowed. Bonds are different to both shares and putting your money in a deposit account with say a Bank or Building Society.

Bonds are different to shares; a bond is usually issued for a fixed period (year or ten years) and the bond holder does not own part of the company. In addition, in the event of the issuing company going bankrupt the bond holder is treated as a creditor and thus may get some of their money back. Thus bonds are less risky than shares and therefore bond yields are lower.

Bonds are different to putting your money on deposit in say a Bank or Builiding Society. With a deposit account, if the Bank or Building Society goes bankrupt, then some or all of your money is protected under the FSCS. However, with a bond, you are a creditor, and thus will get a share of what money is left over after the savers have withdrawn their money (deposits). Where as share holders get the remains of what is left after both savers and bond owners have got their money.

In summary, bonds are riskier than deposit accounts however, they are less risky than shares. As a result bond yields are higher than deposit accounts but less than shares.

See also