Money Helpdesk: The name's 'bond' – but that word has more than one meaning

I got a circular recently about a 7 per cent 2020 Corporate Bond being issued by Provident Financial. In the light of my experience, where approximately half my capital was returned, I queried this with the agent. I was advised that the only reason that my capital would not be returned is if the company fails or becomes insolvent (not sure what the difference is!). As neither of these applied to Scottish Widows, I'm not sure if I should believe it. I would be grateful for your view.

Danny Cox, head of independent advice at Hargreaves Lansdown writes:

The word "bond" has a number of different financial meanings. The 7 per cent 2020 is a single corporate bond offered by Provident Financial. Investors are loaning money (the agreement being known as a "bond") to the company Provident Financial, which has agreed to pay interest at 7 per cent until 2020, at which time the original investment will be returned.

Since investors are loaning money to Provident Financial, if the company becomes insolvent, you will be one of a number of creditors who will all want their money back. By definition, an insolvent company has fewer assets than liabilities and therefore you are likely to suffer a loss.

The reason the interest rate is so attractive is due to the extra risk the investor has over and above a cash deposit.

In the context of the Scottish Widow's investment, "bond" is used as a generic term to describe an investment product.

It sounds like this was some form of stock market-linked structured product or insurance investment which did not perform very well.