Boring Savings Bonds?

By Gemma Stanbury

Something of a myth has grown up about risk-taking through the investment in shares is exciting, while savings in bonds are somehow boring. So, what is it about a savings bond that has earned the "boring" epithet? This is probably all to do with the principle of certainty that lies at the heart of a bond.

A bond is effectively a loan to a company (like a bank, building society or any other financial organisation) or to the government. In return for your loan, the bond issuer pays a fixed rate of interest, or yield, over a predetermined period of time. When the bond reaches maturity, the value of the original loan is repaid. Bonds, therefore, offer the certainty of a known, fixed rate of interest and the certainty of the return of the original investment which some investors will find attractive.

Traditionally, bonds have been used for longer-term investments. Today, however, most banks and building societies offer savings bonds for as short a period as one year with the same fixed rate of interest and return of the original investment. Given the competition for savers' deposits and the uncertainties in the market over interest rates, fixed rate savings bonds, therefore, may provide an attractive vehicle for those wanting security and peace of mind on the rate of return.

For those wanting the still greater security provided by a government-backed savings bond, there are a number of different types offered by National Savings and Investment. Currently available in one, three or five year terms, for example, the Guaranteed Income Bond provides a fixed rate of return throughout the chosen term for savings as small as £500 and up to £1 million, meaning that it is open to all types of investors however much - or little - they have to invest.

These bonds share the conventional feature of the savings bond in that once it has been bought, the savings are not generally withdrawn until completion of the agreed term. National Savings and Investment will, however, allow early redemption of the bond, but typically with the penalty of 90 days interest on the amount cashed in.

The National Savings and Investment's Income Bond also provides a regular monthly income, at a variable rate of interest, but with the flexibility of instant access to the principal savings on demand. There is no set term for such income bonds, which can once again be held in any amount from a minimum of £500 up to a maximum of £1 million.

Savings bonds, therefore, might be regarded as boring in some circles, but only because they offer a degree of certainty in an otherwise uncertain marketplace. Classically fixed rate, fixed term and with a guaranteed return of the initial investment, savings bonds may prove the sensible choice for the cautious or prudent investor.

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