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Can someone clever explain to me how bonds work?

(13 Posts)
chicaguapa Wed 03-Dec-14 21:25:20

I read in the Autumn Statement that the WWI debt had been repaid and I didn't understand it. So I looked it up and found this:

^The government is to repay the nation’s remaining £1.9bn first world war debts.

The Treasury will redeem the war loan bond, which pays 3.5% interest, on 9 March 2015. Issued in 1932 by chancellor Neville Chamberlain to refinance debts run up during the war, the 3.5% bond replaced a gilt issued in 1917 under the slogan: “unlike the soldier, the investor runs no risk”.

The current government is keen to take advantage of low interest rates, and repaying legacy bonds allows it to issue new ones at lower rates.^

I kind of understand a tiny bit what bonds are but what happens to the people who own them and are receiving interest? Will they now stop receiving interest and if so, how come they don't get a say in when the bonds are repaid? confused

TalkinPeace Wed 03-Dec-14 21:33:45

They will get their capital back and no more interest payments.

The most common denominations are £100
and the average annual income has been £2.08

not much loss to those still holding the funds
but a huge saving in administration

caroldecker Wed 03-Dec-14 21:41:47

The government funds borrowing by issuing bonds, nowadays from between 1 and 30 years to maturity. They have a fixed interest (based on the rates at the time of issue) and the longer-term ones go up and down in value as interest rates change. when they are due, the government repays them, normally by issuing new bonds at that days rate. In the war, they issued undated bonds which the goct could repay at anytime (as they did not know when they would have the money for them). Historically rates have been high, so any new bonds issued to pay of the war bonds would hav ebeen more expensive. Today, however, the govt can borrow for 30 years at less than 3%, so is paying off these, now expensive, debts.

caroldecker Wed 03-Dec-14 21:41:54

The government funds borrowing by issuing bonds, nowadays from between 1 and 30 years to maturity. They have a fixed interest (based on the rates at the time of issue) and the longer-term ones go up and down in value as interest rates change. when they are due, the government repays them, normally by issuing new bonds at that days rate. In the war, they issued undated bonds which the goct could repay at anytime (as they did not know when they would have the money for them). Historically rates have been high, so any new bonds issued to pay of the war bonds would hav ebeen more expensive. Today, however, the govt can borrow for 30 years at less than 3%, so is paying off these, now expensive, debts.

elephantspoo Sat 06-Dec-14 01:27:56

The government cannot print money. Money is printed by private banks like the Bank of England, and the government borrows it from them at interest. It does this by printing a bond saying, 'we, the British Government, will pay the bond holder 3.5% interest on the value of this bond for 30 years'.

So they get to spend the money now on what you want them to spend it on (a tax cut, or a 200billion on new roadworks), and your children pay taxes to repay the interest on the debt for as long as that debt goes unpaid.

This is our our grandparents' debts finally getting repaid. They borrowed the money from the future to pay for their war, and we, their grandchildren are now repaying the war debts.

Of course, instead of being responsible and actually repaying the debt, and dealing with it, we as a nation are not willing to make the necessary austerity cuts to pay for it. So we are now going to borrow that same amount of money and more, and make our children and sour grandchildren pay interest on it all of their lives.

This is why taxes get more and more very year, and why your pound buys less and less every year. Food does not get more expensive every year, your pound becomes with less and less every year.

As an interesting side note... At the time this war bond was printed a pound could buy a family groceries for a month. Today that pound has shrunk in value to now be worth only 7p, but the gold in that 1914 £1 coin (sovereign) is still worth £200 and goes a fair way to buying a months groceries.

TalkinPeace Sat 06-Dec-14 15:52:54

However the WW1 debt was at 3.4% and they are replacing it with debt at 1.5% so its not all bad

chicaguapa Sat 06-Dec-14 18:18:26

Thank you. What's the difference between a bond and a loan?

TalkinPeace Sat 06-Dec-14 18:31:10

not much

TwiggyHeart Sat 06-Dec-14 18:39:09

Bonds tend to gave more covenants attached, therefore perceived to be a safer bet (however proved incorrect post 2008!).

MoreBeta Sat 06-Dec-14 18:52:12

Bonds are a type of loan that can be traded (i.e. bought and sold) between counterparties. Normally bonds are issued by large corporations, local Government and national Governments.

Normally a bank loan cannot easily be bought and sold but a bond is a tradeable financial instrument. The price of bonds goes up and down throughout the day like the price of shares, currencies, commodities.

The total amount of bonds in issue in the international market in about $25 trillion.

elephantspoo Sat 06-Dec-14 19:14:30

TalkinPeace - have they replaced it with the same amount of debt at 1.5%, or have they doubled up on it? I haven't been watching.

TalkinPeace Sat 06-Dec-14 19:15:33

same I believe : I watched the story a bit as some of my clients hold the WW1 stock

chicaguapa Sat 06-Dec-14 20:25:04

Great. I understand now. Another bit of investment knowledge added to my bank. smile

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