Fixed rate bonds ‘fix’ the interest.
Unlike a standard bond, a fixed rate bond is a contract to repay borrowed money with interest set at a fixed rate over a specified time period.
The interest rate is known as ‘the coupon rate’ and is paid at specific dates throughout the year, before the bond reaches maturity, and the initial investment is repaid.
Is a fixed rate bond a high risk investment?
The fixed rate bond is seen as a much lower risk investment, as it is not susceptible to fluctuations in interest rates.
Having said that, when inflation is taken into consideration, it can be noted that the actual value of the bond can decrease over time. It is also important to note that these type of bonds often carry long maturity dates, meaning your investment is tied up for a lengthy period of time.
Advantages of fixed rate bonds
- A fixed rate bond protects the savers from interest rate cuts, which would normally affect savings accounts and fluctuating standard bonds.
- With interest rates currently low, fixed rate bonds can pay better than variable accounts, and if rates increase slower than banks expect, savers purchasing fixed rate bonds will benefit from having tied up their money.
- A bond with regular payments could be treated as an additional source of income.
Disadvantages of fixed rate bonds
- Fixed rate bonds, due to the nature of the investment, usually mean a high minimum investment. £1000 is a typical minimum fee, but some require higher minimums, sometime as much as £50,000. Very often, only one deposit will be allowed and once the bond has been established this cannot be topped up.
- It is unlikely that you will be allowed to withdraw any funds once the bond has been established, until the maturity. If you are allowed to do so, it is often the case that you will face penalties such as a loss of interest. It is for this reason that fixed rate bonds are seen as a medium to long-term investment as you are locking your money away for a significant period of time.
- As with any product with a fixed interest rate, there is the possibility that rates will rise and you will be tied to something earning you less than if your money was deposited into a standard savings account.