A bond is a loan you can buy and sell. The issuer pays a fixed rate of interest, the coupon, and repays the face value on a set date. Gilts are bonds issued by the UK government; corporate bonds are issued by companies and usually pay more because the company could fail to pay; bond funds hold many bonds at once and have no maturity date. Bond prices move in the opposite direction to yields, and the longer a bond has to run, the further its price moves.
How a bond works
Every bond has three defining numbers: a face value, also called nominal, a coupon rate and a maturity date. A bond with £100 nominal and a 4% coupon pays £4 a year until maturity, then repays £100. UK gilts pay their coupon in two equal instalments six months apart, and their prices are quoted per £100 of face value (DMO).
You can hold a bond to maturity and collect the payments, or sell it before then to another investor at the market price. That market price is what changes from day to day. The coupon and the repayment at maturity do not, unless the issuer fails to pay.
Price and yield
Yield is the return a buyer gets at today’s price. Because the coupon is fixed, the price has to move for the yield to change: when prices rise, yields fall, and when prices fall, yields rise (DMO). The yield to maturity, or redemption yield, combines the coupons with any gain or loss between the price paid and the face value repaid at the end. The DMO describes it as giving “an indication of the actual return on capital”.
A hypothetical example: a 10-year bond with a 4% coupon, paid once a year, priced at £100, yields 4%. If yields on similar bonds rise to 5%, its price falls to about £92.28, the level at which a new buyer would earn 5% a year to maturity. If yields fall to 3%, the price rises to about £108.53.
Duration: how far the price moves
Duration measures how sensitive a bond’s price is to a change in yields. Roughly, a modified duration of eight means the price moves about 8% for each one percentage point change in yield. Longer bonds have higher duration, because more of their payments sit far in the future. The table uses hypothetical 4% bonds priced at £100 with one coupon a year.
| Years to maturity | Modified duration | Price if yields rise one point | Price if yields fall one point |
|---|---|---|---|
| 2 | 1.9 | £98.14, down 1.9% | £101.91, up 1.9% |
| 10 | 8.1 | £92.28, down 7.7% | £108.53, up 8.5% |
| 30 | 17.3 | £84.63, down 15.4% | £119.60, up 19.6% |
Duration matters to anyone who may sell before maturity, and to every holder of a bond fund, which never reaches a maturity date. A buyer who holds a single bond to the end receives the face value whatever happened to its price on the way.
Credit risk
The second big risk is that the issuer does not pay. For gilts, the DMO notes that the British government “has never failed to make interest payments or principal payments on gilts as they fall due” (DMO). A company can fail, and its bondholders can get back less than face value, late, or nothing. That risk is why corporate bonds usually yield more than gilts of the same length. Credit rating agencies publish views on the likelihood of default, and a bond’s prospectus sets out where it ranks among the company’s creditors if things go wrong.
Gilts, corporate bonds and bond funds compared
| Gilts | Corporate bonds | Bond funds | |
|---|---|---|---|
| Issuer | UK government, through HM Treasury | A company | Many issuers, chosen by a fund manager |
| Maturity | A fixed date | A fixed date | None; the fund keeps buying and selling |
| Main risks | Price before maturity; inflation | Price; default; may be hard to sell | Price; credit; charges; no repayment date |
| Income tax outside a wrapper | Coupons taxed as savings income | Interest taxed as savings income | Interest distributions taxed as interest if over 60% is in qualifying investments |
| Capital gains tax outside a wrapper | Exempt | Exempt if a qualifying corporate bond | Gains on units may be chargeable |
| Where to buy | Platform, broker or the DMO’s own service | Platform or broker | Platform or fund manager |
Our guide to how to buy gilts covers the dealing routes and costs.
Buying corporate bonds after the end of ORB
The London Stock Exchange has run a dedicated Order book for Retail Bonds, known as ORB. In a service notice dated 26 November 2025, the exchange said ORB “will be decommissioned” as it revised its retail bond offering in response to the FCA’s new prospectus rules, which took effect on 19 January 2026 (London Stock Exchange).
In its place, a new “Access Bond” roundel marks bonds on the Main Market that are eligible for retail investors, including those that meet the FCA’s criteria for plain vanilla listed bonds. Issuers confirm eligibility at admission. Order book trading in these bonds continues on the exchange’s Order book for Fixed Income Securities, but only where a market maker supports the bond. The exchange stresses that the roundel is based on information from the issuer and is not an assessment of suitability, complexity or risk.
In practice, the checks on a listed corporate bond are the roundel, whether a market maker supports the bond, and the prospectus. Without a market maker there may be no live price to deal at.
Mini-bonds are a different thing
Not everything sold as a “bond” is a listed bond. The FCA warned on 26 September 2025 that unlisted loan notes and mini-bonds are among the particularly risky products it has seen from unregulated firms, are often used to finance property developments, and “are not suitable for everyday investors” (FCA).
Our guide to how to spot an investment scam lists the warning signs.
How bonds are taxed
- Interest. Gilt coupons and corporate bond interest are savings income. Above the Personal Savings Allowance they are taxed at 20%, 40% or 45% in 2026 to 2027 and at 22%, 42% or 47% from 6 April 2027, across the UK (HMRC).
- Gains on gilts. Exempt from capital gains tax (TCGA 1992, section 115). That makes low-coupon gilts priced below £100 tax-efficient for taxpayers holding them outside an ISA or pension; see low-coupon gilts.
- Gains on corporate bonds. The same exemption covers qualifying corporate bonds (GOV.UK). Broadly, these are sterling bonds that represent a normal commercial loan and cannot be converted into, or redeemed in, another currency (TCGA 1992, section 117).
- Losses. Where a gain would be exempt, a loss is not allowable either (TCGA 1992, section 16).
- Accrued interest. If the nominal value of your securities exceeds £5,000 on any day in the tax year or the year before, the Accrued Income Scheme adjusts your taxable interest when you buy or sell between coupon dates (HMRC, HS343).
- Bond funds. A fund that keeps more than 60% of its investments in qualifying assets throughout a distribution period pays interest distributions, treated as interest (AIF Tax Regulations, regulation 19). Gains on fund units held outside a wrapper can be chargeable.
- Wrappers. A stocks and shares ISA can hold government bonds, corporate bonds and investment funds, with no tax on income or gains (GOV.UK).
What protects you
Bonds are not deposits, so deposit protection does not apply. If you hold bonds or bond funds through an authorised platform that fails with a shortfall in the assets it holds for you, the FSCS can pay up to £85,000 per person, per firm. It cannot accept claims for poor investment performance (FSCS), which includes an issuer failing to pay.
Inflation is the risk bonds share with cash. A conventional bond pays fixed sums, so rising prices erode them; index-linked gilts work differently, as covered in inflation and index-linked gilts. For how bonds fit the wider April 2027 decision about cash, see the cash ISA changes.
