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What are Fixed-Term Bonds?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 January 2020
  • Copyright Protected:
    2003-2020
    Conjecture Corporation
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Fixed-term bonds are debt securities that are structured with a fixed rate of interest that applies to the bond issue from the date of purchase to the date of maturity. Bonds of this type offer the benefit of being able to project returns with a higher degree of accuracy. This is different from bonds that are structured with variable or floating interest rates, since the rate applied may vary from one accounting period to the next.

One of the advantages associated with fixed-term bonds is that investors do not have to be concerned about shifting economic conditions that may occur during the life of the bond issues. Since the interest rate is locked in or fixed, the projected return remains constant, no matter what is happening in the wider economy. This makes it much easier to identify the amount of interest payments received at specific times throughout the bond’s life, and be prepared to use those funds in whatever manner the investor desires.

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Conservative investors tend to find that fixed-term bonds are a viable addition to investment portfolios. Since the degree of risk involved is very low, and the returns are easy to project, people who are not interested in getting involved with highly volatile deals will often see the bonds as an excellent way to generate levels of return not possible with other so-called safe investments like savings accounts. At the same time, investors manage to avoid the risk associated with many stock or commodities options. The end result is the ability to ground the investment portfolio in investments that are considered reliable, and that require very little attention between the time of purchase and the date that the bonds reach full maturity.

As with any type of bond issue, it is important to look closely at all the terms and conditions that apply to fixed-term bonds before actually initiating a transaction. This includes reading the terms to determine if the bond is guaranteed in some manner, a provision that ensures the investor will at least receive the return of the principal investment if the bond issuer should default for some reason. In addition, it is also a good idea to determine if the bond structure allows the issuer to call the bond early. Depending on the fixed rate that applies to the bond, and how close to maturity the bond must be in order for it to be called, the investor may decide that considering other fixed-term bonds would be a better idea.

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