An asset-backed bond’s value is linked to the price of an asset such as gold, oil or coal. Most bonds have a fixed value determined at the time of purchase. This value is a combination of the bond’s face value and its interest rate, both of which are set at the time of issue.
Bonds can yield higher returns than bank savings accounts; however, they are riskier. Bonds and savings accounts are both viable investment options. However, with savings accounts, there is no option of selling to another investor. Bonds, on the other hand, can be offloaded, the most crucial question here however is, do you get better returns on a bond than a bank?
In this article, we will focus on asset-backed or commodity backed bonds and savings accounts. What are the fundamental differences between asset-backed bonds and savings accounts?
Is Your Money Safe?
With a basic savings account, there is no chance of losing your money. You can keep your money in the bank for as long as you want, and access it whenever you need to. However, when it comes to bank shares, is your money safe? A clear example of a banking crisis that affected thousands of shareholders was the 2008 RBS £45 billion government bailout in the UK.
Royal Bank of Scotland otherwise known as RBS was rescued from collapse by a massive taxpayer-funded government bailout in 2008 leaving thousands of shareholders out of pocket. RBS paid their first dividends to shareholders in 2018, ten years after the controversial government bailout.
In 2018, the bank which is 62% government owned paid a 2p dividend to more than 190,000 shareholders. Public dismay surrounding the RBS bailout directly impacted public perception of high street banks in the UK, with more than 2,900 high street bank closures in the past three years, the British public are losing faith in traditional banking.
Natwest closed more than 600 branches between 2015 and 2018, followed closely by HSBC which closed more than 400 high street branches.
Asset-backed bonds cannot be instantly accessed. However, investors can sell their bonds to other investors to obtain their funds. The most beneficial option when dealing with bonds is to leave them to mature for at least three to five years. In terms of risk, there is more risk associated with investing in bonds, but the yields are indeed higher than parking your money in a savings account.
Asset-backed bonds are certainly not risk-free, the most significant example of high-level failure for asset-backed bondholders was the infamous Enron scandal. Highly publicized in 2001, the American Energy corporation Enron famously collapsed leaving over 20,000 creditors and bondholders out of pocket by more than $67 billion, leaving the energy corporation bankrupt.
Most basic savings accounts typically offer between 1% and 3% annual return on your money. Some banks in the UK, for example, provide higher returns on your initial deposit; however, the rates often drop after the first year. For example, Nationwide offers 5% on £2,500 fixed for 12 months; thereafter the rate drops to 1%. Bank returns are reliable and are suitable for low-risk investors.
The return on a bond is potentially higher than a bank. Nevertheless, there is more risk associated with investing in bonds. Investors who are willing to take the risk will undoubtedly reap the long term benefits. Some asset-backed bonds offer fixed returns ranging from 7% to 13.5%. New Coal Solutions, for example, provides a fixed annual yield of 12%.
Deciding where to park your money is a significant decision. Bank accounts are generally the safer option, but for avid wealth creators, bonds will provide more significant long term returns.