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Question

How do Bonds work?

Answer

Bonds are usually issued at £100 each and pay back £100 when they mature, plus interest at a fixed rate each year until then. 

If you buy in the market for more than £100 after they are issued and hold the bond until maturity, you will get back less than you invested.  However, you may be prepared to do this because the interest that the bond offers is higher than what’s available in the market at the time and overall you make a profit. 

If you pay less than the issue price you will make a gain on the repayment of your capital, but it is likely the interest rate will be lower than what’s available in the market. 

So when buying a bond or gilt you should consider the overall return that it offers you.

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