Government backed stock, known as Gilts, are loans made to the Government by investors. Much of the national debt is comprised of Government Gilts, so when the Government wishes to ‘borrow’ more funds it simply issues a new Gilt.
Gilts can provide the investor with an income derived from either interest payments, a final redemption payment or a combination of the both. Inflation can erode away the true value of the Gilts’ redemption, whilst interest rates can increase or decrease the attractiveness of a particular Gilt. Broadly speaking, when interest rates rise the real value of the Gilt will fall and vice versa. Many professional investors and fund managers may invest a proportion of their overall portfolio in Gilts, as Gilts can help to diversify and spread risk, in addition to providing them with an income.
Corporate Bonds are similar to Gilts and work in much the same way, however Corporate Bonds, as the name suggests, are issued by companies as opposed to the Government. The Company involved may isssue these Bonds as it can provide them with a cheaper form of borrowing than say, a bank loan, and as a result the investor may often acheive better returns than those of Government Gilts.
Companies will tend to offer increased returns in order to attract investors, as the risks of a Corporate company going bankrupt, even a multinational, is greater than the risk of the Government being able to repay it’s debt, and therefore the risks to the investor are substantially increased.
Corporate Bonds are usually invested in to by fund managers and other ‘professionals’ and, similar to Gilts, can be used to diversify and spread the investment risk or produce increased income.