What is a bond?

The term 'bond' has multiple meanings in the world of finance so it's important that these meanings are not confused. This article looks at the bonds that are also known as time deposits, as offered by banks and building societies in the UK.


What is a bond?
A bond, or time deposit, is akin to a savings account in which money is locked away for a fixed number of years (typically 1-5 years) and subject to a fixed rate of interest. When this fixed period ends, the bond is said to have 'matured'. 


Pros and Cons
Bonds are characteristically subject to restrictions such as:

• Penalties (usually of 6+ months of interest) for early withdrawals.
• Permitting only a single deposit, or accepting further deposits only until a particular date. 

The interest rates offered by bonds will typically be the best available. Finding the right bond is, therefore, a balancing act between the interest rate you want to gain and the restrictions you're prepared to adhere to. As a general rule, the more onerous the restrictions are, the better rate of interest you're likely to receive.


Considerations
The main question is how much money you can afford to relinquish for years at a time. Even if you are living comfortably and within your means, it's impossible to know what might be around the corner and so it is unwise to commit all of your savings into a bond.

Equally, it is all but impossible to know what will happen to interest rates over the coming years. Though it seems unlikely at the time of writing, an improvement in the economy could drive interest up and leave you with your money bound to a comparatively pitiful rate. 

It should also be borne in mind that the £85,000 government guarantee also applies to bonds. If you are considering investing more than that, be aware that you will be taking a gamble if the bank or building society were to fail.


Conclusion
Before committing your money into a time deposit, make sure that you can afford to do so while making reasonable provisions for dealing with any unforeseen problems that may arise within the term. If you're concerned that you would not be able to leave the money alone for such a term, consider putting your money in an easy access savings account instead.