Buying bonds

Identifying your bond

Once you have determined which bond or bonds to buy, it is important to correctly identify it to prevent errors in dealing or other misunderstandings. Each issuer may have several bonds trading in the market at any given time.

Market convention describes bonds in the following notation: issuer, coupon, maturity. Thus, the bond illustrated below would be described as the "BT Group PLC five and six eighths percent 7 December 2028". As at 29 April 2024, the details of this bond are as below.

• What will the final cost be?
  The price you see on the screen is known as the "clean" price of the bonds and on this basis an investor buying £10,000 of bonds at a price of 105.00p will pay £10,500. However, we must also consider the factor of any accrued interest.
• What is accrued interest?

  If an investor buys a bond on its first day of issue, or just after the last coupon payment, the price seen on the screen will be the full price. However, when buying a bond part way through its coupon period (for instance 4 months after the last coupon payment for an annual bond), there will be an adjustment for the income that has "accrued" to the bond. This is standard practice in the bond market and strikes a fair balance between buyers and sellers, as well as neatly differentiating between cash flows from income and those from capital gains.

  With the majority of non-gilt bonds, the basis of this accrued interest is calculated on a "30/360" basis. This assumes that each month has 30 days, and each year has 360 days. Thus, let us assume that we are buying £10,000 nominal of the BT Group PLC five and six eighths percent 7 December 2028 (as of 29 April 2024). The market price is 105.00p and the trade is for settlement in two business days time.

  £10,000 nominal of BT Group PLC 5.750% 7 December 2028 @ 105.00 = £10,500

  The settlement date is 1 May 2024. The bond pays a coupon annually and the last payment was on 7 December 2023.

  7 December to 1 May = 144 days on a 30/360 basis

  So, the accrued interest will equal 144 days / 360 days times the annual coupon, times £10,000 nominal, or:

  144/360 x 0.0575 x £10,000 = £230.00

  Thus, our contract note will show roughly the following:

  	Amount
  £10,000 nominal of BT Group PLC 5.750% 7 December 2028 @ 105.00	£10,500.00
  Accrued interest	£230.00
  Commission	£50.00
  Total	£10,780.00

  Note: The price shown on the screen will not include accrued interest and will be known as the "clean price". The effective price that you pay, including any accrued interest is known as the "dirty price"

• Accrued interest for Gilts

  The Debt Management Office produces a detailed document on calculating the accrued interest on Gilts which can be downloaded from their website. This covers the subject in detail, including the complex calculations performed on index-linked Gilts.

  At the risk of oversimplifying the subject, the main variations from the calculation process shown above are as follows:

  • Most Gilts pay coupons twice a year (the majority of non Gilts pay annual coupons). The exceptions to this rule are some of the undated bonds such as 2.5% Consuls.
  • The accrued interest is calculated on "actual/actual" basis, where the true number of calendar days is used to determine the apportionment of the coupon.
• Selling your bonds

  The normal strategy for investing in bonds is typically "buy and hold". Remember, unlike equities there is no need to sell in order to realise your investment; capital will be returned to you on maturity.

  However, from time to time investors need to sell a bond in order to raise capital, or perhaps to switch into other investment opportunities. In the event of this, bonds can be sold back into the market. Please note this market price may be higher or lower than your purchase price and this will impact the return you receive on the investment.

  When selling a bond, the accrued interest must also be factored into the calculation. In this case, any unpaid interest will be paid over from the new buyer to the seller, effectively the reverse of the scenario illustrated above.