A Guide to Investing Using Fixed Rate Bonds

A fixed-rate bond is ideal for people who want to invest and save money in the long term to try and gain as much interest as possible.

An introduction

Fixed-rate bonds pay a set rate of interest for a certain period of time, so when you apply for this savings vessel, you already know in advance exactly how much money you get back in return as the rate is fixed for the entirety of the account terms.

The interest rate applicable to the bond will not be affected whatsoever by any Bank of England interest rate changes.

Typically speaking the longer you are prepared to wait for your money, i.e. the longer the term of the bond, the higher the interest rate will be in return and the greater the reward on your investment.

Fixed rate bonds are not corporate bonds

At this stage, I should explain what fixed-rate bonds are not.

They are not corporate bonds, the debt of a private company which I cover in our guide to investing in corporate bonds. In our free investing course, I explain how corporate bonds are used as part of a diversified investment portfolio.

Fixed-rate bonds are also different from junk bonds and bonds in general (see our bond definition).

In contrast, fixed-rate bonds are a type of savings account, you open them with a regulated bank or building society.

The advantages of investing with fixed rate bonds

Probably the main advantage of investing with a fixed rate bond is that your rate of interest can never deteriorate, so you’re interest rate is protected.

With normal savings accounts interest rates can be changed by providers when they basically feel like it, but you are safe in the knowledge that your interest rate will never change with a fixed rate bond.

Another advantage is that you know prior to investing how much return on investment you will actually get, so you can choose which account would best suit you.

The disadvantages of investing with fixed rate bonds

One of the main disadvantages of fixed-rate bonds is that with most providers your funds are secured in the account until the duration of the bond is complete.

So if you sign up for a 5-year bond, then you will not be able to withdraw any of your money until the 5 years are up. Some providers may allow a withdrawal but you may lose out a lot of interest.

In truth, the longer the term of the bond the better the rate you will receive, so if you want the best rate, then you will probably have to tie up your cash for a long time.

As investing books will point out – this needn’t be a disadvantage so long as you match this investment with cash which you don’t need access to over that period.

Another thing that puts people off investing using a fixed rate bond is that the minimum investment is normally relatively high. You may find a bond that has a minimum investment of £1000, but the best products that have the best rates can require investments of £10,000 or even £20,000.

Would a fixed rate bond be right for you?

Fixed-rate bonds are suited for people who wish to put their money away for a number of years. You should only use a fixed rate bond if you are happy to invest your cash and not touch it for a number of years; otherwise, you may be better suited with easy access or normal savings account.

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