What Is Fixed Rate of Return?

Malcolm Tatum

A fixed rate of return is a situation in which the return on an investment is at a specific rate or amount, rather than having the possibility of that return fluctuating due to shifts in the economy or the marketplace. Typically, this type of rate of return (ROR) is lower, since the fixed rate is likely to be related to an annuity or asset that carries a lower amount of risk or volatility. In spite of the fact that the actual returns may not be considered exceptional, investments of this type are popular with more conservative investors who are happier with the lower risk and more or less steady returns.

An example of a fixed-rate-of-return account is a certificate of deposit -- commonly called a CD -- that requires letting a bank hold a certain amount of money over a period of months or years.
An example of a fixed-rate-of-return account is a certificate of deposit -- commonly called a CD -- that requires letting a bank hold a certain amount of money over a period of months or years.

One of the benefits of a fixed rate of return is that it is very simple to project how much will actually be earned on the investment. For example, if an investor chooses to deposit funds into a Certificate of Deposit (CD) at a local bank, and the CD comes with a fixed rate of return, then the investor can easily calculate the amount of money he or she will earn on that deposit, based on the total funds in the CD and the interest rate that is associated with the account. Since a time limit is usually included in the structure of this safe investment, the client can also project when that return will be earned. At that time, he or she can also decide whether to cash in the CD for a full return of the originally invested amount plus the fixed rate of return, or either withdraw the interest and leave the principal in place for another term or allow the entire amount to roll over for another investment period.

It's easy to project how much will be earned on a fixed-rate investment.
It's easy to project how much will be earned on a fixed-rate investment.

The fixed rate of return is offered with a wide range of investment opportunities. Bonds are often configured with a fixed rate, as well as different types of annuity programs. Investors have the chance to evaluate opportunities based on that fixed rate, and decide if acquiring the investment and holding it long enough to generate the fixed returns is worth the time and effort. Should the fixed rate of return not be sufficient in the opinion of the investor to merit committing the principal to the purchase of the asset for the minimum amount of time required, he or she can choose to decline participation and look for other investment opportunities.

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Since a fixed rate of return is usually associated with investments that carry little in the way of risk or volatility, an investor who is somewhat conservative will often find this an ideal situation. The outcome is much more predictable than with riskier ventures, in which the potential for incurring some sort of loss is much greater. While the actual returns will be lower than with other investments, it is possible to build a portfolio based on these low risk investments and over time accrue a considerable amount of wealth.

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