Investment basics - fixed interest

In this video of my investment basics series, I’m going to talk about fixed interest investments, in particular government and company bonds. Bonds have a set interest rate and go for a set period—usually a year or more. A bond ‘matures’ at the end of the set period. Although a bond goes for that fixed period, you’re not locked in until maturity, because bonds have a secondary market where you can sell your bond and get out of the investment. This gives them liquidity that allows you to cash them out. Fixed interest investments are considered a low risk but there are some things to be aware of. Firstly, the strength of the investment will depend on the strength of the organisation that’s offering the bond and the surety that they will be able to pay out the bond upon maturity. This is why it’s important to do your research and read the information booklet they give you, called a prospectus, that outlines the key features and risks. If you choose to sell the bond ahead of the maturity date, you also need to consider how interest rates will affect your return. In bonds, the sale value works opposite to interest rates. If interest rates fall, your higher interest bond will increase in value. If interest rates go up, the value of your lower interest bond will go down. The long-term nature of bonds mean they can offer a stable long-term base for an investment strategy. They can give you a steady income, with the opportunity to grow your capital. Bonds are a lower risk investment that give you a fixed return until the bond matures. They generally have a longer maturity date than cash. However, they have a greater risk of loss depending on the underlying organisation and what’s happening with interest rates. Check out my next video, where I’ll cover investing in property.