Fixed Rate Bonds Overview
Fixed rate bonds also known as fixed income securities are considered to be a good investment option for an investor’s portfolio. It is suitable for investors who intend to generate a guaranteed interest rate for a given term.
You’ll know exactly what interest you will receive at the end of the term, although you will be tied into the account for the whole period, as generally, you will not be able to access your funds at all before maturity, except in the event of your death – at which point the estate can often choose to close the bond – or retain it until the normal maturity date.
Another consideration is how often the interest is paid. There are different interest payment schedules available: monthly, quarterly, semi-annually or annually. It is also possible to arrange a single interest payment at the end of the term. Early withdrawals from fixed-rate bonds may incur a penalty fee as well as a reduction or complete loss of the accrued interest.
Compound interest is applied to most savings accounts and has a dramatic effect on returns. Put simply, compound interest equates to “interest on top of interest” and means that the longer you save, the better your return. Terms usually run between 1 and 10 years, with longer terms providing better interest rates and subsequently greater compound interest.
Whilst very secure and with a predictable return, fixed rate bonds also have a number of limitations. In almost all cases, you will be unable to access your funds during the term of your investment without incurring a loss of interest or even a penalty fee.
Also, given the nature of a fixed rate bond, if interest rates rise in the market during the time in which your money is invested it will ultimately mean you miss out on the increased interest. Conversely, if interest rates decrease in the market you will also still receive the pre-agreed interest rate on your investment. However, these conditions do not detract from the fact that fixed bond rates are a very safe way to save.