Investment Types - High Income Bonds
High Income Bonds
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High Income Bonds

High income bonds acquired a bad reputation because of so-called ‘precipice bonds’ sold a decade ago.  These promised a guaranteed super-high income as long as the stock market went up, but if the market went down, the bond fell off a cliff, and a big loss of capital was possible.  Nowadays the companies which issue them are more likely to be offering a ‘high income bond’ fund – an investment fund focused on corporate bonds issued by companies and offering higher levels of income.

Guarantees

However, the principle of offering a higher income but with some risk to capital survives in bonds, linked to movements in the stock market.  Many of the ‘guaranteed bonds’ sold on the high street protect 100% of capital, and offer fixed returns if the stock market goes up. These bonds, also known as structured products, typically run over six years.  There are also other plans which do not guarantee to protect your capital but they should offer much higher returns – but you will lose some of your capital if the market falls. These are usually sold by wealth managers.

Like other stock market based investments, there is no guarantee of any return on capital. Do be aware that the more income that's paid out to the bondholder, the riskier the investment is likely to be.

Considerations for investors

For anyone considering a high-income bond product, check just how much of your investment is protected - if any. Also, keep any eye on charges. The Financial Services Authority (FSA) has warned in the past that some funds may deduct their charges for running the investment after they have paid out any income, which can put more pressure on the original investment. Some high-income funds in the past were sharply criticised by consumer watchdog organisations for failing to warn consumers sufficiently of their overall risk.

As a rule of thumb, the higher the returns you may make, the riskier the investment will be. Therefore, high-income products are higher risk investments, and so should only be used as part of an overall financial strategy. When interest rates start to rise, they should be viewed with particular caution.

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