A beginner’s guide to investing in bonds

Most people think of bonds as something dusty and dull, like a savings certificate from the 1950s or your uncle's tie collection.

In reality, a bond is just a loan. You lend money to a government or a company. In return, they pay you interest and promise to give you the money back on a fixed date. That's the whole idea.

Bonds are often used by investors who want steady income or a gentler ride than the stock market sometimes offers. But not everyone bothers with them.

Plenty of people go all-in on global equities and sleep just fine. But, for those who want more predictability or need to plan around a specific date, bonds can be a useful part of the mix.

How bonds actually work

When you buy a bond, you're lending money. The borrower could be a government or a company. In return, they agree to pay you regular interest and to hand back the full amount you lent them at a set date in the future.

Most bonds have a face value of £100. This is known as the "par value", and it's the amount the borrower promises to repay you when the bond reaches its expiry date. Some bonds come in £1,000 chunks, but the £100 format is common, especially in the UK.

The interest on a bond is called the coupon. It's stated as a percentage of the face value. A 5% coupon on a £100 bond means you'll receive £5 a year in interest.

These payments usually arrive in two equal chunks each year, though a few bonds pay annually. The term "coupon" comes from the olden days when bonds came with physical coupons you'd tear off and take to the bank. Slightly less convenient than a direct deposit.

The maturity date is when the bond expires. This is when you should get your £100 back, assuming the borrower hasn't gone bust. Some bonds mature in a year or two. Others run for decades. The name of the bond often includes the year it matures, like "UK Treasury 2035".

Bonds don't just sit still. They're bought and sold on the market, and their price can move. The market price is the going rate for that bond on any given day. If it trades at £100, it's "at par". If it trades at £95, that's "at a discount". A price of £105 is "a premium".

The price moves when interest rates change or if the bond issuer looks more or less likely to pay up. If the Bank of England starts hiking rates, older bonds with fewer coupons often drop in value. If rates fall, bond prices can rise.

This brings us to yield, which tells us how much return you're actually getting. It's not always the same as the coupon. If you buy a £100 bond with a 5% coupon, the yield is 5%.

But, if you pick up the same bond for £90, your £5 a year now works out as a yield of 5.56%. (That's £5 divided by £90, then multiplied by 100 to get a percentage.) Yield goes up when price goes down, and the other way round. It's a seesaw, not a straight line.

In practice, that looks something like this:

Then there's credit risk, also called default risk, also known as "oh no, where did my money go?" This is the chance the issuer won't pay you what they owe.

UK government bonds (gilts - more on those to come) are seen as extremely low risk. The same can't always be said for companies.

Credit rating agencies give bonds a rating, like AAA (very safe) or BB (more of a gamble). Bonds rated below BBB are often called "junk" – which sounds harsh, but just means the risk is higher and the interest usually is too.

Finally, if you buy bonds between interest payments, the price can include some interest that's already built up. The clean price is just the bond's price. The dirty price is what you actually pay: bond price plus the interest it's accrued since the last coupon payment.

Most platforms quote the clean price, but the dirty price is what comes out of your account. It's nothing to stress out about; you'll get that extra interest back when the next coupon lands.

TL;DR: bond jargon at a glance

Word	Meaning
Bond	A loan you give to a government or company. They pay you interest and return your money at the end.
Face value	Usually £100. This is what you'll get back at maturity.
Coupon	The fixed interest you earn each year, based on face value. A 5% coupon pays £5 per year on a £100 bond.
Maturity date	The expiry date of the bond. That's when you're due to get your money back.
Market price	The bond's current value if you sell it. Can be above or below £100.
Yield	The actual return you get based on the price you pay. Price down = yield up, and vice versa.
Credit risk	The chance the issuer won't pay you back. AAA = very safe. Junk = riskier but higher interest.
Clean price	The sticker price.
Dirty price	What you actually pay. Bond price plus built-up interest.

Why some people actually like bonds

Not everyone wants the drama of the stock market. Bonds don't offer much excitement, and they rarely match the returns of shares, but they do come with features some investors find genuinely useful.

Steady income

A bond tells you what it will pay and when. If it has a 5% coupon and a £1,000 face value, you get £50 a year. The timing and amount are fixed. That predictability is useful for people who want reliable returns, especially those living off their investments.

Lower volatility

Bonds usually move around less than shares. While a share price might swing 10% in a week, a high-quality bond often doesn't flinch. This calmer ride appeals to cautious investors and anyone tired of checking their portfolio with one eye closed.

Capital preservation

Assuming the issuer stays solvent, you'll get your full investment back at maturity. That makes bonds attractive if you have a deadline, like a house deposit, and you want to know the money will still be there when you need it.

Diversification

Bonds and shares don't always move in the same direction. If shares fall during a downturn, government bonds might hold steady or even rise. Mixing the two helps spread your risk and smooths out the overall ride.

When bonds go bad

Bonds have a reputation for being safe and sensible. That's mostly fair, but it doesn't mean they're risk-free. Even a nice, boring bond can still ruin your day if you're not paying attention.

Credit risk

This is the risk the issuer can't pay back what they owe. It's more likely with corporate bonds than government ones. If the company behind your bond goes bust, you could lose some or all of your investment.

Interest rate risk

Bond prices and interest rates move in opposite directions. If you buy a bond that pays 2% and new ones start paying 4%, yours suddenly looks a bit rubbish in comparison. To make it attractive, the price would need to fall.

This matters most if you need to sell early. If you hold the bond to maturity, you'll still get the full amount back (assuming no default), but the price swings in between can be jarring.

Inflation risk

Even if the bond pays as promised, inflation can quietly eat into your return. If your bond yields 3% and inflation hits 4%, you're technically making money, but your spending power is shrinking. The numbers go up but your shopping basket shrinks.

Liquidity risk

Not all bonds are easy to sell. Government bonds tend to have a deep pool of buyers, but some corporate bonds, especially smaller ones, can be harder to shift. If you need to sell quickly, you might have to accept a lower price.

Tax wrapper matters

Bonds can be held inside a stocks & shares ISA or a pension like a SIPP. Inside these, the interest you earn is tax-free, and you don't need to report anything to HMRC.

Outside these wrappers, bond interest is taxed as savings income. Basic-rate taxpayers get a £1,000 savings allowance, higher-rate taxpayers get £500, and additional-rate taxpayers get nothing. If you go over your allowance, you'll pay income tax on the rest - 20%, 40%, or 45%, depending on your tax band.

With a SIPP, there's no tax while the money stays inside. But once you start taking it out, it's taxed as income. Head here for a refresher on how it all works.

Types of bonds for UK investors

Not all bonds are created equal. Some are government-backed and boring. Some are corporate and pay you extra for taking on risk. Some are trying to save the planet. Some are just...weird.

Let's run through the main types of bonds available to UK investors if you're buying the bonds themselves (we'll cover funds and ETFs separately).

1. Gilts (UK government bonds)

What they are: loans to His Majesty's Treasury. You lend the money to the government, they pay you interest (the coupon), and give your money back on a fixed date.

Risk: extremely low credit risk. The UK has never defaulted.

Tax: interest is taxable unless held in an ISA. Capital gains are tax-free.

Use case: ideal if you want a known return on a specific timeline with little risk of default.

Gilts might sound posh, but they’re just how the UK borrows money. Read our full beginner's guide.

2. Corporate bonds

What they are: loans to companies. Big, small, stable, shaky - all kinds issue bonds. You'll get more interest than from gilts, but you're taking on more risk.

Risk: varies wildly. An AA-rated bond from Unilever is one thing. An 8% bond from a pizza start-up is another.

Tax: interest gets taxed like any other savings. Unless the bond's in an ISA or a pension, you'll owe income tax on it. As for capital gains, most bog-standard, sterling-denominated corporate bonds are CGT free.

Use case: good for income seekers who are OK with moderate risk.

3. High-yield bonds

What they are: also corporate bonds, but from riskier companies. Also known as "junk bonds", though we think that's a bit rude.

Risk: high. If the company goes belly up, you might never get your money back.

Return: potentially much higher yields to make up for the adrenaline.

Use case: more adventurous investors who want juicy returns and don't mind some credit drama.

4. Index-linked gilts

What they are: government bonds that increase their payouts in line with inflation.

Risk: very low credit risk, but price can be volatile due to long maturities and inflation expectations.

Tax: interest is taxable unless you're holding the bond in an ISA or pension. The inflation-linked top-up to your capital? That's also taxed as income each year, even though you won't see the money until the bond matures. As for capital gains, these bonds are government-issued, so any profit on sale is CGT-free.

Use case: people who worry about inflation eating their savings.

5. Honourable mentions

Foreign bonds: you can buy overseas bonds (e.g. US Treasuries), usually via funds. Risk includes currency swings, and unlike UK gilts or sterling corporate bonds, you will owe capital gains tax if you sell at a profit. Interest is taxable too, and may even be hit with foreign withholding tax.

Municipal bonds: rare, but they exist. A few local councils offer bonds directly through platforms like Abundance, usually to fund local green projects - but they're very niche and not easy to trade.

Bond types compared at a glance

Type	What is is	Risk level	Tax treatment	Best for
Gilts (UK gov't bonds)	Loans to His Majesty’s Treasury. Low risk, fixed interest, money back at maturity.	Extremely low credit risk. The UK has never defaulted.	Interest taxed unless in ISA/pension. Capital gains = tax-free.	Low-risk investors wanting steady, predictable returns.
Corporate bonds	Loans to companies. Higher interest than gilts but more risk.	Varies by issuer.	Interest taxed unless in ISA/pension. Most sterling-denominated bonds = CGT-free.	Income seekers comfortable with moderate risk.
High-yield bonds	Riskier corporate bonds offering higher returns. AKA “junk bonds”.	High. Company defaults = you could lose the lot.	Same as corporate bonds: income taxed unless sheltered. CGT rules vary, check the specifics.	Adventurous investors chasing yield and happy to handle some drama.
Index-linked gilts	UK gov’t bonds where payouts rise with inflation	Very low credit risk. But prices can swing due to long duration/inflation shifts.	Interest + inflation-linked uplift both taxed as income annually (even if not received yet). CGT-free if sold at profit.	Inflation-conscious investors wanting to protect the real value of their investment.
Foreign bonds	Overseas gov’t or corp bonds. Often accessed via funds.	Varies. Plus FX risk can hit hard.	Interest is taxable. Not exempt from capital gains. Foreign withholding taxes may also apply unless relief is claimed.	Diversified portfolios with a global tilt.
Municipal bonds	Bonds from UK local authorities. Rare and mostly green.	Credit risk depends on the council. Hard to trade.	Interest is taxable. Exempt from capital gains.	Eco-minded investors backing local projects. Not for liquidity lovers.

These are examples, not investment recommendations. Capital is always at risk when using investment products.

How to buy individual bonds: Step-by-step guide with Hargreaves Lansdown

• Log into or create a Hargreaves Lansdown account.

If you're new, decide if you want to invest into a stocks & shares ISA, a SIPP, or a fund and share (general investment) account.

• Click 'Search' and 'view all results'.
• Filter by 'shares, bonds and other stocks' and type in the name of the bond you're interested in.

Buying a gilt

If you want a UK government bond, type in "gilt" and you'll see a list like "Treasury 0.25% 31/07/2031". This means it's issued by the UK government (Treasury), pays a 0.25% interest annually (the coupon), and matures on 31 July 2031.

• Checking the details.

Once you click on a gilt, you'll see a price chart. Don't panic if it's dipped a bit, because if you hold the bond until its maturity date, you'll get back the full face value (so you won't lose unless you sell early).

You'll also see a running yield, which tells you roughly how much income you'll earn each year based on the current price, which is useful for comparing across bonds.

However, the running yield can be misleading because it only looks at the annual coupon payments. It ignores any capital gain or loss you'll make when the bond matures.

For gilts trading below £100, like Treasury 0.25% 31/07/2031 in the screenshot, the real return is much higher than the running yield suggests because you'll also pocket the difference between the purchase price and the £100 repayment at maturity.

To get the full picture, you need the yield to maturity, which online calculators can work out easily. In the example in the screenshot below, the running yield is given as 0.315%, but the yield to maturity is much higher at around 4%.

• Placing the order

If you're happy, click 'Deal' and HL will take you to a dealing page. If the market's open, you can buy instantly by entering how much you want to invest. If it's closed, you'll have to place a 'fill or kill' order: this tells the broker the maximum price you're willing to pay when the market opens. If that price isn't available, the order won't go through.

A note about fees: Watch out for the £11.95 dealing fee, which can eat into your returns, especially if you're buying a small amount. It probably only makes sense if you're investing at least a few thousand pounds.

Buying corporate bonds

• Find your bond

Type the company name into the HL search bar (e.g. "Vodafone" or "National Grid") and look for listings with a fixed interest rate and a future maturity date. Not all companies offer bonds you can buy on HL, so don't expect to find a Greggs bond, no matter how many steak bakes you've financed over the years.

• Do your due diligence.

The screenshot below shows National Grid Electricity Trans 6.5% 2028 trading at £105.45, which means it's trading above par (the par value being £100).

When the bond matures in 2028, you'll only get £100 back, not the £105.45 you paid. The running yield of 6.26% reflects this - it's lower than the 6.5% coupon because you're buying the bond at a premium.

Meanwhile, the modified duration of 2.83% tells you roughly how much the bond's price would fall if interest rates rose by 1%.

Remember: before buying any corporate bond, research the company properly. If the firm collapses, there's no guarantee you'll get your money back (though as a bondholder, you're further up the queue than shareholders when it comes to getting paid).

Bond funds and ETFs: The easier way in

If buying individual bonds sounds fiddly, that's because it is.

Most people don't want to dig through prospectuses or track maturity dates. They want to invest, not moonlight as a debt collector on the latest series of Channel 5's Can't Pay? We'll Take It Away! That's where bond funds come in.

A bond fund does the heavy lifting. You chip in the money, and the fund spreads it across a bunch of different bonds. It might hold hundreds, from government gilts to corporate IOUs and high-yield junk debt. You get a slice of the action, plus a regular income if the fund pays out.

There are two main types:

OEICs (Open-Ended Investment Companies) are priced once a day, so your order gets filled at that day's set price, not instantly like with shares or ETFs. They're not available through every platform.

ETFs (Exchange-Traded Funds), which trade on the stock market like shares. ETFs are usually cheaper and easier to buy or sell quickly.

Funds often quote a rough guide to the income you'll get each year as a percentage of your investment, known as a distribution yield.

Another stat, duration, tells you how sensitive the fund is to interest rate changes. A duration of 5 means the fund might drop 5% if rates rise by one percentage point. The longer the duration, the wobblier it gets.

Most beginners start here for a reason:

• No need to pick individual bonds.
• Easier to diversify.
• Can invest small amounts.
• Can hold inside an ISA, so returns are tax-free.

Just like individual bonds, the returns aren't guaranteed. If interest rates rise sharply, or the bonds inside the fund lose value, your fund could fall too.

But overall, for someone who wants a smoother ride than stocks without babysitting their portfolio, a bond fund can be a decent place to start.

How to invest in a bond fund: Step-by-step walkthrough with Trading 212

On Trading212, you can buy bond funds through a General Investment Account (212 Invest) or a stocks and shares ISA (212 Stocks ISA). If you want to be tax-efficient, opt for the latter.

There are plenty of other brokers out there who also offer bond funds too, like Hargreaves Lansdown or Fidelity. Just be on the lookout for additional platform costs which can eat into your returns.

If you’re new to Trading 212, you can claim free fractional shares worth up to £100 using our referral link, or use promo code ‘FIN’.

• Sign up or log in

If you're new to the platform, here's a quick tutorial. Skip to 1:25 for details on setting up an account. Alternatively, check out our beginner's guide.

• Browse investments.

You can take a look at all the bond funds on offer by clicking the magnifying glass on the homepage, clicking the magnifying glass in the top right, and clicking 'ETFs' under 'browse all' in the bottom left. Then, choose the 'fixed income' option:

• Choose what type of bond fund you'd like

On the list, you'll see government bonds, corporate bonds, inflation-protected bonds, and more. Just keep in mind that not all 'government' bonds are gilts - you'll also see bonds from other areas too (like the US, where they're called 'treasuries').

• Hit buy

Once you're happy with your choice, click 'buy'. You’ll then be able to choose the amount you’d like to invest, and you can also choose between different order types:

• Stop order. You set a trigger price. When the fund reaches that price, the app turns your order into a market buy at the next available price.

• Limit order. You tell Trading 212 the maximum price you’re willing to pay. The order will only go through if the fund’s price is at or below that level.

• Stop-limit order. A combination of the two. You set a trigger price, and when the fund hits it, a limit order is placed instead of a market order. 

If you just want to buy straight away, you can stick with a simple market order, which will execute instantly at the current price (as long as the markets are open).

• Review your order.

Make sure you're happy with the details, then you're all set.

Not technically bonds, but still worth knowing about

Some government products wear the "bond label" but behave more like savings accounts or lottery tickets:

1. NS&I Green Savings Bonds

What they are: Fixed-rate savings with an eco theme. You lock your money away and get interest at the end. Not tradable. Not for this tutorial.

Risk: NS&I (National Savings and Investments) bonds are 100% government-backed.

Tax: NS&I interest is taxable and can't go in a stocks & shares ISA.

Use case: Those who want their money doing good – or at least trying to.

2. Premium bonds

What they are: An NS&I product where you don't earn interest – instead, your money goes into a monthly prize draw. The more you hold, the more chances to win. Your original stake stays safe.

Risk: Zero credit risk (it's government-backed), but no guaranteed returns, just suspense and a bit of superstition.

Tax: Prizes are totally tax-free. No income tax, no CGT.

Use case: For anyone who likes the idea of a savings account crossed with the National Lottery. We made a whole video about investing premium bonds if you want to know more (filmed outside a suspiciously secure building near Blackpool 🕵️‍♂️).

So, are bonds right for me?

Bonds suit people who want steady income or a bit more predictability than the stock market offers. They're useful if you need a known amount of money at a fixed time, and they often rise in value when shares fall, which helps steady the ship.

Some are risky, some are dull, and some manage to be both at once. Always check who you're lending to and what you're being paid. A juicy yield isn't a green light to switch your brain off.

Bonds won't make you rich fast, but they can help you stay invested and sleep better. For plenty of people, that's enough.

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