NS&I fixed-rate bond - is the current 1-year strictly worse than the 3-year bond?
www.nsandi.com/guaranteed-growth-bonds as of 2017-12-29:
1 year: 1.5% AER.
3 year: 2.2% AER.
www.nsandi.com/files/published_files/asset/pdf/guaranteed-growth-bonds-brochure-print-friendly.pdf (same date):
63. The amount due when a Bond is cashed in between
anniversary dates will be the capitalised value of the Bond
(see paragraph 14) (or the original Bond value if the Bond
has been held for less than one year) plus interest earned at
1/365th of the annual interest rate for each day held since
the last anniversary date (or date of investment if the Bond
has been held for less than one year) less any penalty
deducted (see paragraphs 50 and 51).
On the 3 year bond, the value of the early withdrawal penalty is 2.2 * 90 / 365 ~= 0.54%. So withdrawing e.g. after 367 days would lower the effective interest rate... to ~1.65%?
Is there any disadvantage to the 3 year bond? I'm not concerned with the corner case of a withdrawal in the first 90 days.
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I've read the terms and I can't see any material disadvantage after the initial 90 day period.
As you imply, the loss if you withdrew the money during the first 90 days would be slightly larger for the 3-year bond than for the 1-year bond. The difference reduces to 0 over the 90 days, and from then on the 3-year bond always has a better return than the 1-year bond.
Some very minor possible differences:
The 1-year and 3-year bonds are different "issues" and there's a limit of £1,000,000 you can put in each issue, so if you have a lot to invest you might not be able to put it all in a 3-year bond.
At the end of the fixed term, they might offer to roll it over into a new bond (paragraphs 79-80). That might be on terms that aren't available for new investments (this has happened in the past with the index-linked savings bonds that are no longer on sale, for example). So if you cash out the 3-year bond after 1 years, you might miss out on some opportunity offered to holders of the 1-year bond. But the chances of this really mattering seem very slim.
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