Recently, the Republic of Estonia issued an offer of unsecured bonds. Kaspar Kalvet, CEO of Estonian Holm Bank, explains the pros and cons of bonds compared to fixed-term deposits. “The offer of national bonds to Estonian retail investors is very welcome news, as it provides an additional investment opportunity for small investors and supports the development of the local capital market. The interest paid to the people of Estonia on these bonds will also boost the local economy as a whole,” says the bank’s CEO.
Security
“As these are bonds offered by the state, they are comparable to local bank deposits from a security point of view, as local bank deposits are also guaranteed up to 100,000 euros by the national Guarantee Fund per depositor in each bank,” Kalvet explains.
Interest income
You should pay attention to the interest earned. “Today it is worth considering both the state bond offer, which guarantees an interest rate of 3.3% per year for two years, and the interest rates on bank deposits for different terms,” Kalvet says. “The deposit rates peaked last year, but even now you can still find bank deposit terms with interest rates close to 4%. Right now you can open a two-year deposit at Holm Bank with an interest rate of 3.5% per year, while for a 12-month deposit the bank will pay you 3.9%,” Kalvet gives an example.
Income tax
There is no difference in income tax between deposits and bonds. In both cases, income tax is deducted from the outpayment, unless it is an investment account, in which instance a separate statement must be made and no income tax will be deducted.
Different fees
In the case of fixed-term deposits, banks usually do not charge a deposit opening or contractual fee. You should bear in mind that when you open a fixed-term deposit, the money will remain inaccessible to the depositor at the bank for the agreed period, and in the event of early termination, the depositor usually loses the interest already earned.
In the case of bonds, money lent to the state also becomes inaccessible to the investor for a fixed term, but bonds can be traded. However, such trading may involve trading fees and the selling price may change over time. Bonds also necessitate a securities account, the opening of which means a bit more paperwork.
In conclusion, the CEO of Holm Bank recommends that everyone does their homework and thoroughly analyses the pros and cons of different investment options and, if necessary, consults an expert to determine the optimal solution. Financial decisions should never be taken lightly.