Be wary of stuff you can’t sell…
My local bank offers two-year bonds in their savings account. Can I sell those if I want to get out sooner?
It’s unlikely. 🤨
So far in this pack, we’ve talked about bonds that you can trade, but it’s a widely used term for a bunch of financial products that you can’t sell on the secondary market.
The bonds in the question are likely to be savings bonds. These are fixed term accounts that pay an amount of interest in line with the term of the account. These cannot be traded on a secondary market and if you require the money within the term there will be penalty - usually the loss of interest.
Bonds like the ones your bank offers may be financially secured by your government if the bank defaults (but check before you buy!).
Another example in the UK, are “mini-bonds”, a specific non-tradable category of bonds which often come with a three- to five-year term. Large companies have used these to raise money (including retailers like John Lewis and Tesco) and they sometimes even incorporate quirky twists like interest being paid in chocolate or retail vouchers.
They’re popular with firms because of the laxer regulatory requirements, but that means there’s also increased risk. Firms have been known to go bust with investors losing all their capital.
If I buy a bond on the secondary market, will I definitely be able to sell it?
Not necessarily! 😯
The market for corporate bonds is often quite illiquid, meaning there aren’t always many buyers and sellers. You might not be able to sell a bond straight away, and you might have to settle for a price lower than you were hoping for – a tradeoff you might be okay with if you’re desperate to rid yourself of the bond.
As you can see, things can get complicated fairly quickly. If you want a more hands-off approach to bond investing, a fund or ETF could be the way to go. In the next session, we’ll explore their pros and cons.
As you know by now, when you invest, your capital is at risk and this learning guide is for information purposes only and is not intended as investment advice.