Investor Education Centre > Corporate Bonds > How Fixed Rate Bonds Work and Why You Might Invest in Them
How Fixed Rate Bonds Work and Why You Might Invest in Them
It's a good idea to diversify your investments to keep your portfolio profitable. Bonds, particularly fixed rate bonds, can make a great addition to any investment portfolio. Here's what you should know about fixed rate bonds and how they may fit into your investment strategy.
What is a bond?
A bond lets you lend money to a company or a government entity. This can be a bank, a public institution, or a commercial organisation--the principles remain the same in all cases.
Put simply, when you secure a bond, you lend an institution money at an agreed interest rate for a set time period. The institution agrees to pay you interest at regular intervals. They also repay the loan at the end of the agreed period.
The "coupon rate" is the interest payable each year.
The bond's face value is the amount you'll receive once the bond "matures", or reaches the end of its term.
There are various bond types out there, and some carry greater risk than others. One of the most common bond types is the fixed rate bond--here's why they may be worth adding to your investment portfolio.
Fixed rate bonds
Fixed rate bonds pay interest at a fixed rate for however long the bond lasts. An investor lends the borrower, or the bond issuer, a lump sum for a period of at least one year. In most cases, you can't access the lump sum you've invested until the fixed term comes to an end.
Fixed rate bonds, particularly bank-issued bonds, offer investors some peace of mind because there's a predictable interest rate, and you're guaranteed to receive at least your principal sum back. Investing in a bank, government body, or a large financial institution means that it's less likely to go bust. In turn, your investment is safer.
The good news is that you don't need large sums of cash to afford a fixed rate bond. Nowadays, you can invest in fixed rate bank and corporate bonds on the Australian Securities Exchange (ASX) for as little as $100.00 a unit.
So, why is it worth considering fixed rate bonds for your portfolio and what should you know before you invest?
Why you should invest in fixed rate bonds
Although investments such as term deposits are generally safer options than bonds, fixed rate bonds do offer higher interest returns. They also offer a degree of income certainty for however long the bond lasts.
It's also worth knowing that, if you invest in fixed rate bank bonds, you are prioritized over equity and hybrid investors if the bank goes bust.
Before investing in fixed rate bonds, you should know that the bond value is prone to fluctuation and sometimes it may be worth less than you put in.
Fixed rate bonds can be a worthwhile addition to any investment portfolio, particularly if you're looking for a more defensive investment strategy.
Fixed rate bonds offer a regular income and they are particularly useful for investors with limited capital available to invest.
This website contains general information only and is not intended to provide any person with financial advice. It does not take into account any person's (or class of persons) investment objectives, financial situation or particular needs, and should not be used as the basis for making investments.