Think of it as lending your money, but on a massive scale and the beneficiaries are companies and governments. When you put your money into Fixed Interest Securities, they will pay the money back after a set time, as well as regularly pay you with a fixed rate of interest throughout the life of the bond.
Loans to the British Government are called Gilts and loans to companies are known as Corporate Bonds. These are very different to with-profit bonds.
Fixed Interest Securities benefits:
- Unlike equities, your income will be pre-determined. Your right to receive the interest, and the final return, can be traded on the stock market to other investors.
- The amount of interest paid will be greater than deposit accounts, because the risks are slightly higher. Government bonds are regarded as relatively safe
- Most Corporate Bond funds state they use only Investment Grade Corporate Bonds, which are bonds with a very low, to medium level of risk.
Fixed Interest Securities drawbacks:
- There is some degree of risk with Fixed Interest Securities. There’s always a chance that the loan may not be repaid. Gilts and companies with high credit ratings tend to be more secure.
- Some funds state they invest in Speculative Grade Corporate Bonds, also known as High Yield, or Junk Bonds. Although higher rates of interest are paid, these are very high risk.
- If savings account interest rates rise, then the amount of extra interest gained by investing in the fixed interest investment will reduce, even though the risk will stay the same. It makes it less valuable to other investors and means you will get less if you sell it.
