What are fixed -rate bonds?
fixed -rate bonds are bonds that are issued with a specific interest rate that relates to the life of the binding. This is, unlike a floating bond, where the interest rate varies on the basis of the current average interest rate. The interest rate known as the coupon rate may be paid at specific intervals during the bond life or is provided in a flat rate when the bond reaches full maturity.
For some investors, fixed -rate bonds are definitely better than with notes on moving rates. More conservative investors who want to know exactly what the return on investment will often prefer a fixed -rate coupon because it is easier to plan what to do with return when it is accepted. To go with a fixed rate also means that the investor does not have to worry about sudden or drastic shifts in the economy that could have an adverse impact on interest rates and thus minimize the expected bond returnwith a floating rate.
Some issuers also prefer fixed -rate bonds, simply because it is easier to calculate how much investors will be paid for bonds. This advantage may be particularly important for municipalities that issue bonds as a means of financing the improvement of municipal assets, such as street tiles or renovation of buildings owned by the city or city. Since taxes are often a source of income used to repay the amount of bonds plus the appropriate interest, the fixed rate helps planned to determine the amount of additional taxation necessary for the adequate financing of the project.
Other investors found that fixed -rate bonds are not according to their ideas, simply because there is no opportunity to increase the return on the bond problem. For this reason, some of these investors are willing to take over the additional risk associated with the floating rate, especially if they show that the average interest rate is likely to increase and weIt becomes an increased level for most of the life of the binding. Although there is always a possibility that the projection will not show accurate, the possibility of returning more is sufficiently attractive to take advantage of the chance to get this higher return.
The decision to invest in fixed -rate bonds is personal. While the approach with a fixed rate is more of a certain thing for the investor, the floating rate offers potential for greater return. Investors should look closely at market indicators and the project whether the interest rate is likely to increase during the loan life and remain at higher levels long enough to return more than with a fixed rate. Once this projection is in hand, it is much easier to determine which type of bonds will probably be in the best interest of the investor.