Is a Fixed Rate Bond Right for Me?

Many investors are looking for a secure way to grow their discretionary income and realise returns that surpass the traditional savings account or certificate of deposit (CD). At the same time, they want to avoid the volatility of the stock market, and one of their most popular choices is to invest in savings bonds.

Deciding which type of savings bond is best for you

If this financial instrument is something you would like to pursue, begin by noting whether the investment you are considering carries a fixed rate or a floating rate, because the difference can be substantial. For example, fixed rate bonds will provide a certain amount of security, but the interest rate will not be changed to adjust for inflation or any other significant financial factor. Conversely, if you have a floating savings bond, the interest rate will change periodically, and at times, this is to the bondholder's advantage.

Benefits of buying a fixed rate bond

Having a fixed rate bond rather than a floating rate bond can prove to be beneficial. Often, the interest rate is announced in May and November, and you will have some idea of what can be expected during those six months. Also, once you invest in a fixed rate bond, it will continue to earn the specified amount, and there are no exceptions. However, you cannot add to the amount you invest when purchasing the bond.

In cases where your total savings exceed £4,000, fixed rate bonds can provide you with some additional flexibility. For example, you have the option of locking up 25% to 50% of your funds in savings bonds and putting the balance in a savings account that you can access instantly. Also, all savings administered by a banking group are guaranteed by the government, up to £85,000.

Setting interest rates for savings bonds

As a rule, the Secretary of the Treasury determines the interest rates on every type of bond, and in some cases, someone else who specialises in this area may be designated to establish those rates as well. Note that fixed rate bonds usually offer a higher interest rate than traditional savings accounts, and you will benefit from purchasing them if interest rates fall.

Where you can buy savings bonds

They can be purchased from most banks and building societies in the UK, and generally speaking, the interest rates offered by the latter group are preferable. Also, since the competition has increased recently, you will find that more than 100 different savings bonds are available for your consideration.