If a bond is considered a fixed rate bond, then this simply means that it has been issued with a set interest rate. This rate holds all throughout the bond’s life. As such, it is taken as the opposite of a floating rate bond. Floating rate bonds are those whose interest rates change, depending on what the average interest rate is at a given time.
One of the advantages of purchasing a fixed rate bond is knowing, from the very start, what to expect out of the investment. As such, beginners in the investment world, as well as more experienced but conservative ones see this as a good and stable option. Those who are not very well-versed in investments also stand to benefit, because it no longer becomes necessary to monitor every single change in the economy that have a detrimental effect to the expected return of the bond.
Floating rate bonds may be tempting, especially during periods when interest rates are high. Indeed, they do offer greater possibilities for high returns on investment, and are very desirable, especially for more experienced investors. If current trends and additional research on possible risks indicate that there is a big chance for interest rates to skyrocket, then it is an excellent idea to buy floating rate bonds. However, the fact that they do not offer the same reliability as fixed bonds remains. As such, even if an investor decides to purchase floating rate bonds, it can be a good idea to diversify and purchase some fixed rate bonds as well.
