A fixed rate bond, as the name suggests, pays a fixed rate of interest every year for a specific period of time as stated in the bond details. For investors who are looking at various fixed income instruments to invest their money in, fixed-rate bonds offer an excellent opportunity. But before investing any money in the financial instrument, there are six basic things about fixed rate bonds that you must know about.
Choosing A Bond
Choosing a fixed rate bond is dependent on three important criteria. First, the amount you have invested in the bond, second, the time period of the bond and third, the interest rate of the bond. Using these three criteria, you can find a bond that is most suitable for your investment style. For example, if you want to earn the highest possible interest rate on a bond, then you can opt for long-term bonds. In contrast, if you do not wish to wait for a long time to get back your investment and are okay with a lower interest rate, then a short-term bond will be more suitable.
Maturity refers to the date on which the bond becomes due, and you will be repaid the amount invested in the bond. However, not all fixed rate bonds come with the sole option of principal repayment upon maturity. There are bonds that will automatically be converted into variable rate accounts when they mature. Be sure to talk with your financial advisor if you do not wish to be repaid the principal amount, but would rather have it assigned to some other purpose.
Great For Stability Seeking Investors
If your primary concern as an investor is the absolute safety of your investment, then fixed term bonds are your best option. These bonds come with a specified due date on which the principal has to be repaid. As such, you are completely guaranteed to receive back every penny you have invested right from the moment you make the investment. This is in complete contrast to investing in something like shares where there is no guarantee that the amount you invested will be paid back to you on any date. In fact, you can end up losing every penny you invest in shares. And that is something that will never happen with bond investments.
Minimum/Maximum Deposit Limitations
The minimum deposit requirement for a fixed rate bond is pretty low. There are bonds that you can invest from as low as £1. In contrast, there are also fixed rate bonds that have a very high minimum deposit requirement. And in exchange for making such a big deposit, you will be receiving a higher rate of return. As far as the maximum deposit limit is concerned, it is pretty high enough that an average investor can put in all the money they want without being concerned of whether they will breach the limit or not.
Planned Family Investments
Fixed rate bonds offer a great way for you to make investments in a way that all your family plans can be fulfilled easily. For example, maybe your son is now 8 years old and will join a college when he turns 18. By setting up a 10-year bond that will mature around the time your son will join college, you can make sure that you are not short of cash when the time comes and can support your son’s financial requirements to join the university. Plus, the interest compounding for 10 years will have appreciated the principal into a higher amount by the end of the term period. So, if you are confident of your financial planning abilities and would like to ensure the financial security of your spouse and children, fixed rate bonds will prove to be a good investment.
Access To Funds
Once you invest in a fixed term bond, you won’t be able to withdraw any funds during the term period. Only after the term period is over will you be allowed to access the funds. So, if you have invested in an 8-year bond, you will have to wait until the end of the 8-year period to take back the principal amount. This might seem like a drawback to some. But for investors who are long-term planners and want to create milestones in the future where they will receive a fixed amount of money, fixed rate bonds are a blessing. Plus, the inability to withdraw can actually work in your favor as it will prevent you from impulsively taking out the money and squandering it for some unnecessary purpose.