Types of Fixed Interest

Understanding Fixed-Interest Investments

Mar 6, 2009 Wei Yin Wong

With the share market being so volatile, investors may enjoy safer and better returns with fixed interest.

During financial crises, the share market is no longer a viable source of income. However, fixed-interest investments can still offer many healthy returns, provided that potential investors do some homework before taking the plunge.

New players may be overwhelmed and confused about fixed interest. Here’s a quick guide and definitions of the many fixed-interest options available.

Defining Fixed-Interest Investments

There are many options, including government bonds, corporate bonds, debentures, unsecured notes and managed funds. They all share the following features:

• The investor's money is invested as a loan for a fixed upfront interest rate.
• The investor will be repaid the initial capital in full at a maturity date.
• The investor receives interest payments regularly (monthly, quarterly or yearly) and at maturity.

In essence, investing in fixed interest is lending money to a bank, credit union, building society or the government in return for interest and the full repayment of capital upon maturity. The longer the period of loan, the higher the interest rate. It is ideal for generating a regular and reliable income. And with interest rates rising, these investment options are worth considering.

Government Bonds

Bonds are loans that investors give to the government or large corporations to help fund big projects or finance growth. Government bonds are offered by governments on advertised terms and conditions. The government guarantees the payment of interest and capital on maturity. In Australia, government bonds are highly secure. The trade off for the security is a lower rate of return.

Corporate Bonds

Corporate bonds are also known as debt securities. In Australia, corporate bonds are usually listed on the Australian Stock Exchange (ASX). Through brokers, investors can buy bonds with a small capital.

Debentures

Debentures are loans to the debenture issuer – usually a finance company. The money in turn is lent to a wide group of borrowers such as small business owners, self-employed people and property investors who have chosen not to borrow from banks or who do not meet the criteria to get loans the traditional way. Typically, the returns from debentures are higher than government bonds. For that reason, the risks involved are higher as well.

Unsecured Notes

Like debentures, unsecured notes are issued by a finance company. Investors rely entirely of the company’s financial strength and the security it offers. While they offer higher returns, they also carry higher risks.

Cash Management Trusts

Cash Management Trusts invest mainly in fixed interest securities for no more than 12 months. A cash management trust account allows investors easy access to their money as. It also offers a higher interest rate return on the investment than an everyday bank account. However, unlike a term deposit, no penalties are imposed when withdrawals are made.

For reliable and regular returns, fixed-interest options such as government bonds, corporate bonds, debentures, unsecured notes and cash management trusts are worth looking into. Just be sure to do lots of research and check around using government or financial websites before investing.

References:

Australian Securities and Investments Commission Website – Cash and Fixed Interest Investments

Australian Stock Exchange – Interest Rate Securities

The copyright of the article Types of Fixed Interest in Personal Budgeting/Finance is owned by Wei Yin Wong. Permission to republish Types of Fixed Interest in print or online must be granted by the author in writing.

Invest in Fixed Interest