Fixed-rate bonds explained

A fixed-rate bond is also known as a term deposit whereby funds are invested and cannot be accessed until maturity. Interest rates are fixed for the entire duration of the agreement, so that customers know the exact amount of interest their investment will earn them. This is what distinguishes fixed-term bonds from savings accounts with variable interest rates. At the end of the term, contracts can either be prolonged by the customer or the capital plus the interest gained over the term are transferred back to a clearing account.

Before opening an account, it is important to compare fixed bond interest rates. The interest rate will determine the amount of interest a deposit will earn at the end of its term. Customers should compare rates for fixed-rate bond accounts based on the same investment amount and term to maturity in order to ensure comparability.

Another consideration is how often the interest is paid. There are different interest payment schedules available: monthly, quarterly, semi-annually or annually. It is also possible to arrange a single interest payment at the end of the term. Early withdrawals from fixed-rate bonds may incur a penalty fee as well as a reduction or complete loss of the accrued interest.

Compound interest is applied to most savings accounts and has a dramatic effect on returns. Put simply, compound interest equates to “interest on top of interest” and means that the longer you save, the better your return. Terms usually run between 1 and 10 years, with longer terms providing better interest rates and subsequently greater compound interest.

Fixed bond savings offer one of the most secure ways to invest your money with predictable returns. Unlike variable investments, a fixed rate savings bond ensures you benefit from the same interest rate throughout the term of your investment, regardless of fluctuations in the market. Furthermore, your investment is protected through the respective national deposit guarantee schemes that ensure EUR 100,000 per customer and bank (EUR 200,000 for joint accounts) is safe in the event of bank insolvency.

Whilst very secure and with a predictable return, fixed rate bonds also have a number of limitations. In almost all cases, you will be unable to access your funds during the term of your investment without incurring a loss of interest or even a penalty fee. Also, given the nature of a fixed rate bond, if interest rates rise in the market during the time in which your money is invested it will ultimately mean you miss out on the increased interest. Conversely, if interest rates decrease in the market you will also still receive the pre-agreed interest rate on your investment. However, these conditions do not detract from the fact that fixed bond rates are a very safe way to save.