The fixed rate bond is a type of bond that has a fixed rate of interest for the entire term of the maturity of the bond. This means that the bond returns the same amount of the interest for the entire term life of the bond. The major advantage of having a fixed rate bond for investment is that the investor knows the amount of interest they receive and the total span of time for which they are going to receive that interest. The bondholder can easily predict and receive the amount of interest that was decided among the bondholder and the bond issuer at the time of issuing of the bond. The amount of interest will disturb coming to the bond holder in the case if the bond issuer becomes default. With the help of the fixed rate bonds the bond holder can easily predict what is the actually rate of return over its investment. Fixed rate bonds are the best options for those who want to enjoy a fixed rate interest throughout the term so for this purpose they can buy fixed rate treasury bonds, municipal bonds and corporate bonds.
The key risk associated with holding the fixed rate bonds is that they have a fixed rate of interest associated with them and the investor will lose his money if the interest rate rises during the term as the investor’s bond will become less valuable. One of the best thing to avoid such a situation is to purchase short term fixed rate bonds.
Other Related Accounting Articles: