Each year, most people make as greater use of their cash ISA as possible. The more that is saved away, the more money you have earning tax-free interest. Yet many people completely ignore the stocks and shares element of their ISA.
One of the main reasons for this is a mistrust of the risks involved with the stock market. However, the term ''stocks and shares ISA'' is incredibly broad and can cover a wide range of different options, many of which carry little to no risk at all.
One of these options is corporate bonds. A corporate bond is essentially a loan between a company and an individual. Through selling thousands of bonds the company can make large sums of money very quickly. In return the company promises to pay a certain amount of interest each quarter or each year, as well as repaying the full cost of the bond at the end of a pre-agreed period.
Like any other loan, however, companies can default on corporate bonds, so there is a level of risk. If they do not have the capital to meet their regular interest payments, the bond issue may fail leaving bond-owners with nothing.
To make things a little more complex, once you''ve bought a bond you can sell it on. The price may go up or down depending on the state of the wider market and how reliable the original issuing company is.
The reason why corporate bonds can be a good idea is that they are also issued by the government, in which case they are known as government bonds or gilts. Whilst companies can go bankrupt and default on their payments, governments do not, and therefore government bonds make a very sound investment (as proved by their price rocketing during the recession as investors bought government bonds for the security they offer).
With most corporate or government bond ISAs you can choose how much risk you want to take on. The higher the risk, the higher the return but even a low-risk ISA will offer a return of around 5%, far better than any return that you''ll get on a cash ISA.
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