What is a fixed rate bond? Is there a risk involved with them?

15th February 2017

Question: What is a fixed rate bond? Is there a risk involved with them?

Anna’s response:

There can be confusion around the term ‘fixed rate bond’ and so it is important to tread carefully, to make sure you are signing up to what you expected.

The fixed rate bonds that we monitor and provide information on are standard savings accounts. This type of savings account offers a fixed rate of interest for a fixed period of time, which typically ranges from 1 to 5 years, although there are both shorter and longer terms available. 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, so you will not be able to access your funds, unless you pay a hefty penalty, if the provider allows this option.

The top-paying interest rates currently available range from 1.50% gross/AER for 1 year, from Atom Bank to 2.06% gross/AER for 5 years, from both Masthaven Bank and Secure Trust Bank. For more information on the options available, please take a look at our Fixed Rate Bond Best Buy Tables.

Essentially, in exchange for a fixed return, you agree to stay put in the account, which is great if rates are falling, but the opposite is also true; if interest rates are improving, you may find that the rate is no longer competitive.

As with any cash savings account, fixed rate bonds do not pose a risk to the money you put in, unless the provider you choose goes out of business. To protect yourself against this risk, the best advice would be to stick to the Financial Services Compensation Scheme (FSCS) limit, which is currently £85,000 per person, per banking licence.

It is also worth noting at this point another type of cash savings account, which works in a similar way to a fixed rate bond. Sharia compliant fixed term deposits comply with Islamic law but are available to any saver, regardless of religion or culture. Sharia law states that money had no intrinsic value, so neither party can profit from an exchange of money, therefore the payment and receipt of interest is forbidden. Instead, Sharia compliant accounts pay an 'Expected Profit Rate' as an alternative to interest, which is the level of profit paid by the provider to the saver. The provider invests the money deposited by savers to generate a profit, so there is an inherent risk to the return involved, as the return received depends on the performance of the investments made by the provider. Having said that, providers are keen to state that Expected Profit Rates are usually achieved and most providers allow you to take funds away early if the Expected Profit Rate is not likely to be achieved. For more information, please click here for our Sharia Accounts Best Buy Table.

Unlike investments, the interest (or return) you receive from a fixed rate bond is not based on investment returns, so will not fluctuate depending on performance, but this is where some confusion lies in the term ‘bond’. There are a number of investments on the market that include the term bond in the name, such as Corporate Bonds and these are not to be confused with a cash fixed rate bond. Increasingly in recent years, there have been alternative forms of deposit, such as Peer to Peer lending, which often use the term ‘bond’ in their marketing and literature.

That’s not to say that other types of bond are not worth considering, if you are happy with the risks involved. Rather the key is to ensure that if you want a cash savings account, that is what you are getting. If you are in doubt, please refer to our Fixed Rate Bond Best Buy Tables, which only contain cash savings accounts, as that is what we specialise in. If you have further questions or would like to talk about a particular account in more detail, please feel free to contact one of our savings experts on 0800 321 3581 for help and guidance.

 

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