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gary v1

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About gary v1

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    Curtain Jerker

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  1. A government bond is just a loan from the government to the bondholder. It pays a fixed rate of interest and then the initial loan is repaid when the bond matures. With a government bond you know exactly what you'll be getting paid in the future. e.g. a £100 bond that pays you the £100 back in 10 years time and £2 a year interest every year until then. Payments are known in advance and fixed. You can sell your bond to someone else and they'll receive the future payments instead. You may get more or less than the £100 face value but this will depend on interest rates at the time (or in other countries the credit-worthiness of the government - think Greece). With a share the return is totally unknown. You may get paid dividends out of the company profits but how much or if you get any dividends at all is not known in advance. You can also sell your share on the market to someone else but you could get more or less than you paid. If you own shares you own a part of the company so if the company goes bust your share becomes worthless. So in summary it's impossible to know if you'd be better off with the shares or the government bonds until further down the line. In general a well diversified portfolio of shares usually gives better returns over time than government bonds but returns are much more volatile than the safe and steady government bonds. The UK government will never go bust (because they can always print more money to buy back the shares via the central bank which is what quantitative easing was. If the UK government is ever in a position it can't pay bond holders then you have more to worry about than your bond investments). However, presumably the shareholders would rather keep their shares or else they would have bought government bonds to begin with.
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