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Bonds

Simply put, a bond is a type of ‘IOU’. Bonds are one of the classic types of financial instruments and form part of the debt capital market (or fixed rate income market). Bond lenders (usually governments, companies and institutional investors like funds) will lend a certain amount of money to an issuer (the company, institution or government that is borrowing) over a specified period of time...

The name’s Bond…Premium Bond…

What’s in it for the lender? Well, they certainly aren’t lending their money for free! The conditions of bonds are that the money lent must be paid back in full when the set period of time comes to an end (i.e. when the bond ‘matures’), as well as interest payments. If all runs smoothly, the lender will receive these payments at regular intervals through the lending period.

In an ideal world bonds should be beneficial for both sides of the deal – the lender gets the cash injection it needs to achieve its aims and the issuer gets their money back, plus interest (known as the coupon). However, due to fluctuating market prices, economic factors they can at times be a risky investment. Picture the scenario: lend to a government that throws up concerns about its ability to pay back its debts and the rate of interest (and the money you’ll get back) will go up…but there’s the rub! If the lender is unable to pay back the debt after the set time period, then there’s a whole heap of mess to deal with. A classic example is what’s happened with Greece’s finances in the EU.

Bond careers…

There are plenty of roles that feature working with bonds in the finance industry. Within investment banking you could work as a front office trader specialising on the fixed income markets, pricing and trading bonds. In a global bank you may work on bond funds that focus on a specific geographical location. You could work on behalf of a huge variety of clients, from companies to institutional investors, and must also ensure you are making the right decisions to allow the bank to make money. There are also technology and financial analysis roles such as developers and quants in the front office specialising in this market too, developing applications quickly to price bonds.

The middle office of an investment bank also offers roles focusing on fixed-income products such as in risk management. Analysts and risk managers will assess elements such as credit risk (the level of risk associated with how likely it is that a borrower will not be able to make payments and result in losses for the bank/lender) and advise traders, salespeople and portfolio managers accordingly. In the back office you could see through the post trade processes that follow a bond trade.

Bonds can be used to diversify a portfolio of assets as a risk management strategy. Therefore, asset managers at funds (e.g. hedge funds or mutual funds like pension funds) often place orders to buy or sell bonds (amongst various other asset types) within the portfolios they manage. They make these decisions based on the research and advice the analysts and risk managers within their organisations supply them with and recommendations from salespeople at investment banks and brokers.

Getting into the industry…

Front office roles in the fixed income market can provide some big, big salaries. Graduate roles in investment banking average at around £40,000, and there is the potential to earn a lot of money in a very short amount of time. If you fancy working in this industry though then be prepared for long hours and a pressurised work environment. You’ll need at least a 2:1 undergraduate degree, preferably in a finance related degree such as economics to be considered. Quant roles and technology roles will require technical skills and sometimes even a Master’s or PhD in a quantitative subject such as financial mathematics.