WHAT IS A FIXED RATE BOND?

Bond is a very common word that is used in the world of finance. Essentially it is a tool of appreciation of the bond issuer to the holders. It act as a debt security, under which the issuer owes the holders a debt and is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, depending on the terms of the bond.

A Fixed rate bond is a type of bond with a fixed coupon (interest) rate. It usually carries a predetermined interest rate which is payable at the specified dates before bond maturity. Fixed-rate bond is liable to fluctuations in interest rate due to the fixed coupon. Therefore it has a significant amount of interest rate risk. Also it is highly susceptible to a loss in value as a result of inflation. The investor is guaranteed of a solidified return due to the fixed-rate bond’s long maturity schedule and predetermined coupon rate.

The coupon rate and the fixed-payments are delivered periodically to the investor at a percentage rate of the bond’s face value. Due to a fixed-rate bond’s lengthy maturity date, these payments are typically small and as stated before are not tied into interest rates.

In fixed rate bond one is not able to access his/her cash during the term and returns on fixed rate accounts tend to be a lot higher than those offered by easy access accounts. However If you have to make a withdrawal within the term you signed up for, you will be charged a penalty usually in the form of forfeiting interest on your savings. Depending on the fixed rate bond providers often size of this penalty may be tapered downwards as the term of the bond progresses. Nevertheless in the first twelve months you may not be able to access your cash at all.

Fixed rate bonds typically last for between one and five years.

Is the fixed rate bond suitable for everyone?

A fixed rate bond is suitable for individuals or institutions with a large sums of money. However for an individual, you don’t have to be a billionaire to be eligible to the fixed rate bond. But keep in mind that most accounts don’t allow you to add to them once you’ve made your initial deposit, therefore deposit as much as you can afford when opening the account.

Also one has to be prepared to tie up his/her cash for a long period for the interest rate to be higher. This is by taking into consideration that fixed rate bonds typically last for between one and five years.

With at least 1000 euros you are good to go.

Fixed rate bond taxation

The Fixed rate NISAs operate exactly the same way as any other fixed rate bond, but returns are free of income tax.

If you open a fixed rate bond outside a NISA, then you will have to pay tax on your returns at your marginal rate.