Bonds

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Bonds

Local authority bonds and stocks
These are loans to local government. Some loans are in the form of fixed-term bonds that must be held to redemption. Others are stocks, similar to gilts, which can be bought and sold on the stock market. Minimum investment for bonds, this varies from, say, £200 upwards. With stocks, there is no set minimum, but dealing costs would make less than, say, £1,000 uneconomic.

Maximum investment None. Type of return Fixed-term bonds give you fixed interest, that is usually paid every 6 months. Stocks are similar to gilts, paying you a fixed income plus a capital gain or loss, depending on the prices at which the stocks are bought and sold (or redeemed).

Tax treatment
Interest from both bonds and stocks is taxable and paid with income tax at the savings rate (20% in 2000-1) already deducted. Non-taxpayers and starting-rate taxpayers can reclaim all or part of the tax respectively. Basic-rate taxpayers have no further tax to pay. Higher-rate taxpayers have extra to pay. Capital gains on stocks are tax-free. How long you invest for Terms vary.

Like gilts, stocks can be sold before redemption on the stock market. Bonds are typically for two to eight years, and you are locked in for the whole period as these cannot be traded and there is generally no way to get your money back early. Charges - None for bonds.

Stockbroker's commission and a spread between buying and selling prices for stocks. Risk Bonds: the only risk to your capital is that the local authority might default on the loan and be unable to repay it, but this risk is slight; vulnerable to inflation; the fixed term and return mean you could lose out if other interest rates rose. Stocks: similar to conventional gilts, except for possible problems buying and selling, since the market for these stocks is sometimes not very active; slight risk that the local authority might default. Risk rating for both: around five.

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