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HMRC internal manual

VAT Finance Manual

Securities and related services: bonds

A bond is a promise that, in return for an immediate loan, the borrower will pay back the loan (‘principal’) plus interest at an agreed rate on or by a fixed date. The promise is signified by the issue of a promissory note to that effect, an item 6 security which can be bought / subscribed to by people willing to lend.

The bond is said to be sold ‘at discount’. The selling price of the bond is the gross amount paid by the purchaser, which is the amount required immediately by the borrower i.e. the principal of the loan. The gross value of the bond is the value of the principal plus any interest payable. The difference between the two is the value of interest achievable and is considered to be the amount of discount that the issuer is willing to grant when offering the bond.

For the issuer this form of debt security is normally a medium to long-term method of borrowing money. The issue of new bonds is usually arranged by banks, who set the interest yield from the bond, based on their knowledge of current interest rates and economic trends. The arranging bank will normally be paid a fee based on the value of the bond.

The bond may be held until its maturity date but the purchaser will often sell the bond on the secondary market. The selling price is the gross amount paid by the next purchaser, which is normally a figure greater than the price at which the vendor purchased the bond but will definitely be a price lower than the face value of the bond.

As a security it can be sold many times between its date of issue and its date of maturity for a value lower than the face value. The repayment of principal and payment of interest may be done at the maturity date or may be done at specific dates during the lifetime of the bond. Whoever owns the bond at the time these payments are due is entitled to those payments. The price paid by the holder may include an amount to reimburse the former holder for relinquishing ownership but the payments belong to the current holder of the bond.