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The majority of bonds are sold by the banks to retail investors. I could more accurately say that they are “mis-sold” by the banks to retail investors because, in my experience, the average retail investor doesn´t really understand what a bond is, what the investment risks are, or what their alternatives might be. They certainly don´t know that the banks are often scalping a margin from the interest payment as well as taking a sales commission. Which in my book is nothing short of immoral.

A bond is a debt instrument that is issued by a company or a government where they are borrowing money from investors at a pre-agreed rate over a pre-agreed period of time. Bonds are often saleable and tradeable but are rarely a secured investment. If the company issuing the bond goes broke then you will usually lose your money. And because the bond is a stand-alone instrument it is very difficult to understand what, if any, security there may be for investors. If a company is looking for investment then I would generally recommend that investors make their investment via a loan note rather than a bond because:

·         The legal contract for a loan note is more robust than for a  bond

·         A loan note generally pays at a higher rate – average 12% per annum as opposed to average 8% per annum

·         It is far easier to secure the investment against tangible assets

·         Investor´s interests can be protected by a security trustee not solely a regulator

The only benefit that I can see for bonds is that they are tradeable – if you need to get out then you can do so fairly quickly whereas a loan note is illiquid. But given that the majority of the loan notes that we promote are only 12 months long that isn´t a massive concern to most of our clients.

Investment Owl identifies some good Bond investments – generally paying between 7% and 9% per annum for USD and GBP investors. To my horror I recently saw one of the bonds that we arrange for clients being resold by a bank for 3.75% per annum less yield than our clients are receiving. They had taken a 5% arrangement fee and supplemented it by not passing nearly 4% of annual interest to their client.

They wouldn´t get away with that on a loan note because the contract is directly between the client and the borrower.

Which may be why the banks don´t promote loan notes. If you´d like to find out more then get in touch here.

Written by Jon Bennion-Pedley