Fixed Bond Paying at Maturity but NOT Compounded?

karl10247

Please someone set me straight here.

I'm reviewing 3 and 5 year fixed rate bonds from the MSE page:
Savings accounts: 2.92% easy access or up to 4.5% fixed (moneysavingexpert.com)
and other comparison websites

Payment at maturity is pretty clear and understandable but when i look into each fixed bond in detail i see that only a few of them actually compound interest year on year.
On the link above for example the current Top 5-year fixed rate bonds are:
4.5% - Isbank
4.45% - Atom
4.45% - Close Brothers

However when i look into them NONE ARE COMPOUNDED.

Am i reading this right? So the total interest will just be calculated on the initial capital year on year and then all added up at the end.

Are these really non-compounded bonds?
If so how can i identify which are compounded? Would it be useful to have an extra column somewhere to show us which are compounded?

InvesterJones

I think AERs would account for compounding, or the AER for paid at maturity would be less than paid annually, but the link you posted suggests all can be paid annually.

wmb194

karl10247 said:

Please someone set me straight here.

I'm reviewing 3 and 5 year fixed rate bonds from the MSE page:
Savings accounts: 2.92% easy access or up to 4.5% fixed (moneysavingexpert.com)
and other comparison websites

Payment at maturity is pretty clear and understandable but when i look into each fixed bond in detail i see that only a few of them actually compound interest year on year.
On the link above for example the current Top 5-year fixed rate bonds are:
4.5% - Isbank
4.45% - Atom
4.45% - Close Brothers

However when i look into them NONE ARE COMPOUNDED.

Am i reading this right? So the total interest will just be calculated on the initial capital year on year and then all added up at the end.

Are these really non-compounded bonds?
If so how can i identify which are compounded? Would it be useful to have an extra column somewhere to show us which are compounded?

You need to read the terms of the bond and an exception came up recently in one thread but in general if interest is added to an account during its term the interest will compound. You'll find that quite a few bonds insist on paying interest away so you will have to compound it in other accounts.

soulsaver

Well, the Isbank 5 year one isn't compounded because it pays out the interest to your (Raisin?) ac at the end of each year.

Are the others the same?

You can place the interest earned in another account, maybe at a better interest rate, depending what happens to rates during the term.

karl10247

wmb194 said:

You need to read the terms of the bond and an exception came up recently in one thread but in general if interest is added to an account during its term the interest will compound. You'll find that quite a few bonds insist on paying interest away so you will have to compound it in other accounts.

True about reading the Ts and Cs and i have been very careful so far but compounding vs non-compounding bonds should be made very clear to savers on any comparison site including MSE.

It can cost a lot in lost savings going for a higher rate with simple interest versus a lower rate with compound interest.

Example 85k capital investment:

Close Brothers from the link above. It says in their terms "Please note, interest is not compounded". 4.5% Simple interest on 85k at maturity will be about  £19,135

State Bank of India (purely for example) currently pays 4.35% on a 5 year bond paid at maturity but does compound its interest. With compound interest the total returns will be about £20,167

So i believe you can earn more from compound interest at a lower rate than simple interest in a higher rate.


Please someone correct me if im wrong here. But if not all savers should be made aware of this by MSE!

wmb194

karl10247 said:

wmb194 said:

You need to read the terms of the bond and an exception came up recently in one thread but in general if interest is added to an account during its term the interest will compound. You'll find that quite a few bonds insist on paying interest away so you will have to compound it in other accounts.

True about reading the Ts and Cs and i have been very careful so far but compounding vs non-compounding bonds should be made very clear to savers on any comparison site including MSE.

It can cost a lot in lost savings going for a higher rate with simple interest versus a lower rate with compound interest.

Example 85k capital investment:

Close Brothers from the link above. It says in their terms "Please note, interest is not compounded". 4.5% Simple interest on 85k at maturity will be about  £19,135

State Bank of India (purely for example) currently pays 4.35% on a 5 year bond paid at maturity but does compound its interest. With compound interest the total returns will be about £20,167

So i believe you can earn more from compound interest at a lower rate than simple interest in a higher rate.


Please someone correct me if im wrong here. But if not all savers should be made aware of this by MSE!

Meh, it's not the end of the world. Close Brothers pays the interest away so you just put it into another account. Overall you could even do better e.g., put the interest from a 4.5% bond that pays out monthly or annually into First Direct's 7% regular saver.

happybagger

karl10247 said:
But if not all savers should be made aware of this by MSE!

I think the best thing for folk to do would be to read the t&c's of the bonds that interest them and decide whether each fulfils their requirements. As soulsaver says, if the interest is paid out then it can at least be used/reinvested somewhere. The ones that may catch people out are the ones with "simple interest", I remember Union Bank of India being one recent one.

refluxer

I can't speak for some of the banks you mentioned above, but I think that banks that calculate interest in the way you mention are in the minority. 

I've taken out fixed rate accounts with banks like Atom, Ford Money, Shawbrook and others in recent years, had interest paid into the account either annually or monthly and interest has compounded in all of them, which is normal as far as I'm aware.

The only reason why interest wouldn't compound in fixed rate accounts offered by banks like those is if you had it paid away to a different account.

AmityNeon

If interest is only paid at maturity on a multi-year bond, there’s no possibility for interest to compound.

Whether providers quote accurate AER figures is another matter. For a five-year bond paying 4.45% Gross (simple interest or only at maturity) the AER would be 4.1%.

happybagger

I agree they seem to be in a minority.

I remember Access Bank also only paid on maturity.
But looking at their current offering, they have for instance, a 3 yr fix paying "4.40% Gross Rate/AER" and in their illustration for what happens to the 5k example does show that it is effectively compounded annually (5k becomes £5689.47) and paid out after the 3rd anniversary.
https://www.sensiblesavings.co.uk/media/2022/12/SS17-Sensible-Savings-Fixed-Rate-Bonds-Fact-Sheet-V78-14.12.2022.pdf

The UBI key facts give a 3year bond at 4.40% accruing interest which is paid out at maturity, this time the example shows £1000 becomes £1132, therefore NOT effectively compounding. But I notice they only give it as 4.40% gross, and don't declare an AER. As AmityNeon says above, this would be an effective AER less than 4.40%
https://www.unionbankofindiauk.co.uk/Portals/0/pdf/rates/Summary_Box_Fixed_rate_GBP_deposit_05_01_2023.pdf

AmityNeon

A better comparison of the above 3Y bonds from Access Bank and UBI would be:

• 4.60% Gross / 4.40% AER
• 4.40% Gross / 4.22% AER

I personally don't think Gross/AER figures should be equal unless annual interest is actually added to the account balance to allow for compounding. If Access Bank actually use 4.4% in their calculations, then they're adding interest without paying interest.