Fixed Term Bond Rate Comparisons

gordonjazz

Last week (12.-16.10.09) Radio 4's "Moneybox" Savings and Investment team were asked for advice on re-investing the capital from a recently matured bond.

The advice was to invest now in a two year 3%+ interest bond rather than a currently available five year 5%+ interest bond. This was because interest rates will probably rise again in a couple of years time.

If I put £1000 into a five year 5% bond it will have earned £250 interest in total.

If I put £1000 into a two year 3% bond it will earn a total of £60 in interest.

To match the earnings of the five year 5% bond I will then have to find a three year bond offering 6.3% interest. That is very close to a pre-crash level of interest rate. Do they really believe interest rates will be so high so soon?

Ideas please?

gordonjazz

D1zzy

gordonjazz wrote: »

Last week (12.-16.10.09) Radio 4's "Moneybox" Savings and Investment team were asked for advice on re-investing the capital from a recently matured bond.

The advice was to invest now in a two year 3%+ interest bond rather than a currently available five year 5%+ interest bond. This was because interest rates will probably rise again in a couple of years time.

If I put £1000 into a five year 5% bond it will have earned £250 interest in total.

If I put £1000 into a two year 3% bond it will earn a total of £60 in interest.

To match the earnings of the five year 5% bond I will then have to find a three year bond offering 6.3% interest. That is very close to a pre-crash level of interest rate. Do they really believe interest rates will be so high so soon?

Ideas please?

gordonjazz

Lots of recent threads on this. I was with moneybox until a recent comparison of the net interest for a 2yr bond at 4.3% with a 5 yr at 5.1% with a 90day interest equivalent penalty for early withdrawal. For withdrawal after 2 years the net interest was virtually the same - so on that basis I opted for 5 years. I am now considering/comparing longer period bonds but only if there is an escape clause.

Reaper

The solution is to get one lasting 2 years that pays better than 3%, then the case for a short term is more clear cut.

For example the AA currently offers 4.35%
http://www.theaa.com/savings/fixed-rate-savings-accounts-products.html

KingL

For example the AA currently offers 4.35%

....which'd need a 5.43% rate on the other 3 years.

dougz_2

D1zzy wrote: »

2 years 5% gross = £100 net = £80
penalty based on 90 days gross interest £33 - earnings (80-33) =£47

That penalty figure looks too high?

D1zzy

dougz wrote: »

That penalty figure looks too high?

Yep 90 days 1/4 of a year not 1/3 .:o.. give me coffeeeee
........................- so penalty £25
have amended

thanks

dougz_2

D1zzy wrote: »

Yep 90 days 1/4 of a year

But arent you quoting interest for 2 years making it half again or have I misunderstood?

D1zzy

dougz wrote: »

But arent you quoting interest for 2 years making it half again or have I misunderstood?

No its me ...........Its been a bad day (- I'll just delete the figures -only put them in as an afterthought)

ed123_2

.....you also have to consider that interest received now/next year(depending on inflation rate) etc is worth more than that in three/four/five years time ie when comparing say a five year at 5.3% and a two year at 4.35%......

soulsaver

Ah but also consider in the event of inflation remaining low....