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I am looking at buying a bank corporate bond instead of placing money into a savings account.

Say I buy a 2 year maturity corporate bond, that yields exactly 2% per year (in terms of yield to maturity, so taking into account whether it's above or below par).

If the bank default, in which orders will funds be repayed? First to the depositor of the savings account, or to the corporate bond holders? Or do they have the same level of maturity?

If the savings I get from the savings account is 1%, it sounds better to me to buy the corporate bond, if they have the same level of seniority. Is that right, or am I missing something?

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  • you may also consider an buying a fund or ETF that holds many bonds. That way you would get the increased rate over a savings account but the default of any single bond company among the hundreds in the fund would not be as catastrophic. Also, indexes of many bonds can be more liquid if you would ever need to sell than many individual bonds.
    – rhaskett
    Commented Nov 20, 2017 at 2:43

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The bond will rank below depositors, so it's riskier than the savings account.

The savings account is very safe if you have less than £75,000 in accounts with the bank, as then it would be covered by the deposit guarantee Financial Services Compensation Scheme.

Also note that bonds tend to have a fixed maturity whereas savings accounts usually let you get your money out at any time, perhaps with some notice.

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  • One can also get things called savings bonds, which are savings accounts with no option of an earlier withdrawal. The best 2-year ones of these are offering around 2%, and have the full £85 000 FSCS protection.
    – richardb
    Commented Nov 19, 2017 at 14:56

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