Info 1: fixed rate bond definition
Info 2: fixed rate bond works
Info 3: fixed rate bond vs floating rate bonds
Info 4: example for fixed rate bond
Opening information:
Fixed rate bond breaks into three words fixed, rate, and bonds. Fixed means pre-determined, rate means percentage, and bond means dent instruments. Fixed-rate bonds are pre-determined percent debt instruments.
So now let’s have a look at what is a fixed rate bond, how a fixed rate bond works in the public market, and what is the difference between a fixed rate bond and a floating rate bond, finally one brief example of a fixed bond.
Info 1: fixed rate bond definition
Mr. Markieo is a public Investor who purchased and is mostly interested in investing in equities shares, but he didn’t have much experience investing.
His investing in any kind of public individual equities securities would get losses, he couldn’t able to make a greater return for a long time because he lacked the education of the market.
Therefore Mr. Markieo had to turn his investing journey from stock to debt instruments which pay a pre-determined interest percentage each year until it reaches the mature date.
However, he purchased and invested about 2.5 million dollars in Corporate bonds with 1000 dollars which pay a 6.5 percent interest rate for the next 30 years.
And half a million dollars on another kind of debt instrument bonds which are released by the government as floating rate bonds with interest rates following a mortgage interest percentage.
The Corporate bond pays the pre-determined percentage amount for Mr. Markieo but the floating rate bond percentage would change according to the mortgage interest.
Here the bonds that pay a pre-determined percentage amount from the corporate debts for him are what are named fixed rate bonds, so let’s jump into knowing the key difference in it anyway.
Info 2: how fixed-rate bonds work
Fixed-rate bonds don’t represent any of the specifics of the object or things, instead, they are debt instruments that pay the pre-determined percentage amount as interest until it reaches the expiration date.
Therefore any of the people of Investors who had an investment in the debt Securities of bonds which pay a fixed percentage of amount every year or semi-annually are considered as fixed rate bonds.
Supposedly if the same bonds failed to pay the pre-determined interest, then such bonds would not come in the category of the fixed interest rate.
If any of the central federal governments released bonds with an interest rate of 2.5 percent with an expiration date of 30 years, which are normally elaborated as fixed rate government bonds.
If the same national local government would release municipal bonds with a pre-determined interest rate of 1.9 percent, would such debt instruments also be categorized as a fixed-rate bonds?
Next, the country’s public Corporations which issued bonds with a higher interest rate than government bonds which are highly likely to pay higher interest rates with pre-determined amounts are also illustrated as fixed rate Corporate bonds.
Then the private company that supplies the bond instruments with decent risk would pay a higher interest than Corporate bonds at pre-determined amounts which are known to be fixed-rate bonds.
However, public Industries which are trading over the counter at the public market have released bonds when they don’t have enough business capital, if they released such debts at a fixed rate, were also separated as bonds at a fixed rate.
Most people confuse fixed-rate bonds and floating-rate bonds, so let’s jump into the key differences anyway.
Info 3: fixed rate bonds vs floating rate bond
Fixed-rate bonds refer to no control over the interest rate for a bond Investors, indeed the issuer would determine what interest rate a certain issuer is willing to pay it.
On the other side, floating rate bonds are the ones that demonstrate the interest rate not on the issuer side, despite interest followed by any of the market exchange or bank rate. So they couldn’t be a fixed rate bond.
To make you more clear about the fixed bond rate, let’s look into one brief example below.
Info 4: example of fixed-rate bond
Say company Y is a tech industry, and its board had planned to not release any more public shares so they decided to issue debt instruments called bonds with no interest rate but with a huge high discount value.
Their government also had to supply the bonds by following home loan interest rates for supplying bonds, which led not a pre-determined interest rate for the payment of debts.
Here none of the bonds would be considered as a fixed rate bond because no debts had determined interest until it matured.