What Is the Difference Between a Fixed Rate & Flat Rate?

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The terms "fixed rate" and "flat rate" sound interchangeable in nature but, in fact, are not. These are terms that express constancy of price and percentage from the separate viewpoints of consumers and producers. The term "fixed rate" is associated with the yield or accrual on interest-bearing items, such as bonds and loans. By contrast, "flat rate" describes a pricing model used by producers with respect to volume.

Fixed Rate

A fixed rate, or fixed interest rate, pertains to instruments like mortgages, bonds, certificates of deposit or another financial arrangement in which a lending party is compensated with interest by a borrower. A fixed rate is simply an interest rate that remains the same throughout the life of the instrument to which it has been applied. For example, if a bond with a term to maturity of five years from the date of issue has a fixed interest rate of 2 percent, the bond will accrue 2 percent per year for each of the five years until it matures.

Opposite of Fixed Rate

To help better illustrate the nature of a fixed rate, consider its opposite: the variable rate. Items that accrue interest at a variable rate experience periodic fluctuations in interest. The rate on such items is adjusted each payment cycle. In the case of a bond, the rate is adjusted according to the change in some benchmark rate, such as the prime rate. For instance, if a quarterly-paying bond carries an interest rate of 2 percent on March 31 and the benchmark rate is one-tenth of a percentage point higher on June 30, the bond's interest rate will be adjusted upward to 2.1 percent.

Flat Rate

A flat rate is a method used by producers for pricing services relating to some product, such as financial assets in the case of an investment house. A flat rate is a price rather than a percentage and is typically applied where variable sales volume is concerned. For instance, an investment broker may charge clients a flat rate of \$50 for giving investment advice, whether they purchase \$10 or \$10,000 in securities.