Retail bonds: What investors should look for

Almost all retail bonds are secured against a company as a whole, rather than specific assets such as property, and if the company is in financial trouble you'll find yourself in a queue of creditors.

But bondholders stand ahead of ordinary shareholders, so if the company is one you'd normally consider buying shares in, not only is your capital safer but your bond interest payment or coupon is also safer than an equivalent dividend.

But that comes at a price. "It is worth remembering you won't get the upside in bonds [either in price or in income] that you may get in equities," says Hargreaves Lansdown's investment analyst Rob Morgan.

You won't find much investment research on retail bonds. The prospectus is usually on the issuer's website but understanding the capital structure, seniority and covenant details is not easy. On top of any research you do, you need to be confi dent in the strength of the company.

Rise and fall

It's worth bearing in mind that bond prices aren't immune to the same news and rumours that affect shares. A company that issues a profit warning may well suffer a fall in bond prices, though generally less severe than that which afflicts shareholders.

Bonds have tax advantages as most pay coupons gross and are exempt from capital gains tax. But because bond coupons are taxed as income, tax wrappers are still important.

However, issues with less than five years to run are not eligible for individual savings accounts but can be put in personal pensions. If you sell your bond before the coupon is due, you'll get a pro-rata portion of the payment, known as 'accrued interest'.

Diversification is key when investing in retail bonds. You need to offset risk by having a number of holdings, just as with shares. A new Fixed Income Order Book ( has been set up to provide retail investors with an opportunity to cut the bid-to-offer spreads that hamper trading in all but the most liquid bonds that aren't yet on the ORB.