All That You Need to Know About Fixed Rate Bonds

We are all living in an age partially defined by financial concerns. While some of us are in better positions than others, the simple fact of the matter is that it is always better to work smart as opposed to hard. This is why there are many investment opportunities currently available. Some (such as open-market ventures) are associated with higher levels of risk than others including ISAs.

However, what if you do not mind placing your money away for a predetermined amount of time in order to enjoy a substantial return? One interesting option is known as a fixed rate bond. Let's take a closer look at how these bonds work, some of their major benefits and a handful of the most impressive opportunities at the moment.

What is a Fixed Rate Bond?

As you have likely already guessed from the term itself, this is a type of bond which offers you a fixed rate of return in relation to the initial amount of money put aside. The main difference between this type of programme and a standard savings account or an ISA (Individual Savings Account) is that you will be provided with a higher rate of return.

In other words, your money will be generating a profit even while it is locked away. Now that we appreciate the main principle of fixed rate bonds, let us take an in-depth look at a handful of additional advantages that you can expect to enjoy.

What are the Main Benefits?

Every type of financial investment is associated with a specific level of risk. For instance, shares in an IPO company can be unpredictable while property investments tend to provide more steady returns over time. It can be argued that this very same level of relative stability is what has attracted to many customers to fixed rate bonds.

We need to keep in mind that many standard investments will provide variable interest rates. In other words, these rates can and will change over time. While this is great news if they happen to rise, the exact opposite is just as true. Lower rates could very well impact your overall returns. This is not the case in regards to fixed rate bonds. As the rates are steady, you are able to calculate exactly how much you will expect to make once the bond itself matures (becomes liquid).

This is also an excellent way to avoid snap decisions by the Bank of England that might have otherwise hurt your overall savings. So, it should come as no great surprise that fixed rate bonds are often used as conservative “hedges” against the volatility that can sometimes be attributed to the open markets.

A Quick Look at the Contractual Time Frames

It is nonetheless important to point out a unique characteristic of fixed rate bonds. In order to enjoy stable returns on interest, you will normally be locked into these positions for a predetermined period of time. This will generally represent between one and five years (depending upon the provider).

Also, keep in mind that longer durations are generally equated with higher rates of return. This also signifies that cancelling an obligation before the time period has expired can result in hefty fees; sometimes negating the profits that you might have otherwise been able to enjoy.

Issues to Address Before Making a Commitment

The primary question involves how long you are able to keep your funds tied up within a fixed rate bond. In other words, is forfeiting your liquidity for up to five years worth the returns that you will expect to enjoy? Also, be sure to take a look at whether or not the bond in question will provide you with FSCS (Financial Services Compensation Scheme) protection in the event that it becomes illiquid or otherwise fails to yield to produce the results that you were promised.

As many banks and building societies offer these packages, it is a good idea to compare and contrast the different opportunities in order to appreciate which options seem to be the most attractive.

A Quick Look at the Best Deals on the Market at the Present

Now that we can appreciate the associated benefits of these bonds, it is a good idea to list some of the best offers on the market (at the time that this article was written). Be sure to check out these offers:

  • RCI Bank: Five years with 1% AER (FSCS protection)
  • HTB: Three years with 0.95% AER (FSCS protection)
  • My Community Bank: Three years with 0.85% AER (FSCS protection)
  • Habib Bank Zurich: One year with 0.85% AER (FSCS protection)

Keep in mind that each of these institutions will require a minimum deposit, so be sure to read the terms and conditions.

Putting it All Together

Fixed rate bonds are excellent ways to save for the future if you have been looking to embrace a more stable and conservative approach. Of course, always be sure to perform additional research and to speak with the provider in question in order to make the right decision at the appropriate time.