Finance · 14 July 2021

A Brief Introduction to Fixed-Rate Bonds

fixed rate

While there may be no shortage of fixed rate savings accounts available on the high street, few offer particularly attractive returns.  In terms of short and long-term potential, the average savings account is not a particularly lucrative investment vehicle.

An alternative for those who are willing to invest their money for a set period of time is a fixed rate bond, but how do fixed rate bonds work, and who are they suitable for?

What is a Fixed Rate Bond?

A fixed rate bond works in a similar way to a fixed rate savings account, though with a fixed rate bond, you are unable to access your money for the agreed period for typically 1 to 5 years.

In return, the investor is offered a higher rate of interest than any comparable savings account. Interest rates vary significantly from one fixed rate bond to the next, in accordance with the provider, the size of the investments and the length of the term.

Fixed Rate Bond Advantages

The biggest advantage of a fixed rate bond is the higher rate of interest when compared to a typical savings account, the fact that the agreed rate of interest is fixed means that it cannot be altered at any time at the discretion of the provider.

This is something that often happens with most conventional savings accounts where the rate of interest can increase or decrease at any time, with a fixed bond you know exactly what kind of return to expect at the time you take out the product.

Fixed Rate Bond Disadvantages

On the downside there is no option for withdrawing or accessing your money before the end of the agreed term.  Fixed rate bonds are only suitable for those who can comfortably afford to give up access to the amount of money invested for a set period of time.

Most companies offering fixed rate bonds, do not offer FSCS protection. In the unlikely event that the bond fails, a lack of FSCS protection could result in the investor losing some or all of their money.

It is therefore essential to ensure that your bond is protected by suitable security.


 
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