Nationwide may be paying me only 0.45% on my savings and Smile a laughable 0.31% on a few old Isas (although I’m in the process of moving them to Intelligent Finance at 2.75%), but at least there’s part of my portfolio where I’m earning 10% or more.

While the big banks — Lloyds, Royal Bank of Scotland, Barclays and HSBC — pay ordinary savers virtually nothing on deposits, one group of investors is earning between 8% and 14% from the banks thanks to the credit crunch.

You never get something for nothing, of course, and these bank investments are not for widows and orphans — but they are where the smart money has been heading for several months now.

Imagine Lloyds offered a bond that paid a fixed 6% a year until 2015, when your capital could be repaid in full. How much would you expect to pay for that level of return, given Bank rate is just 0.5%? Above or below the bond’s face value? Many income seekers would probably be willing to pay more in the current climate.

In fact, this investment is trading at just 43p in the £1. That gives you a yield (income as a proportion of the current price) of nearly 14%.

Such investments do exist and they are known as tier 1 securities — a kind of halfway house between bonds and equities. If a bank went bust, it would have to repay depositors first, followed by its interbank loans, then its tier 2 capital, followed by its tier 1 capital, with shareholders at the back of the queue. Ordinary shareholders would have to be wiped out before tier 1 holders wouldn’t get anything back.

Interest payments can be suspended, though, and that’s one of the reasons why some tier 1 bonds are trading at less than half face value. Neelie Kroes, the EU competition commissioner, recently suggested Lloyds and RBS may have to defer payments on tier 1 bonds in return for having received state aid.

There is also a risk you won’t get your capital back, as shown last week when the Financial Services Authority (FSA), the City watchdog, prevented Royal Bank of Scotland from redeeming (or “calling”) four of its bonds, pending discussions with the Commission.

However, John Pattullo, manager of the Henderson Strategic Bond fund, thinks that longer-term bank debt is worth the risk. While interest payments could be deferred for two years, you still have the prospect of a 15% return for another three.

Even if you don’t fancy the risk of a Lloyds or an RBS bond, you can earn about 8% from stronger banks such as Barclays, Standard Chartered and HSBC. You can buy these bonds direct from a stockbroker such as Killik & Co. It likes HSBC Capital Funding, which pays 8.208% with a call date in June 2015. The bond is in fact trading above par at 102.5p, meaning you are getting a yield of 7.7% if you take into account the small capital loss at maturity — but Patrick Gordon, senior investment strategist at Killik, thinks this is still a good return in the current climate.

Alternatively, you could buy in through a bond fund, as I did. Henderson Strategic Bond has about 3.5% in Lloyds and RBS bonds combined, with other holdings in HSBC, Standard Chartered and the French banks too.

Bond funds are likely to be pushed heavily in the coming mini Isa season, particularly since many over-fifties will seek income over capital growth.

But make sure you know what you are getting. The most popular type of corporate bond fund invests in blue-chip names but these are closely linked to the gilts market — and here there is a risk of price falls over the next few years.

Gilt prices tend to fall when interest rates rise because their fixed income becomes less attractive. Pattullo calculates that prices would fall 10.5% if interest rates rose by 1.5 percentage points, which is not beyond the realms of possibility over the next few years. However, the risk of default for blue-chip bonds would recede, which would offset any losses — but it’s a risk you need to be aware of.

On the other hand, the best rewards may be in riskier bond funds (the strategic and high-yield sectors) that are buying bank debt. You’ll have to wait a while but if you believe the worst is behind us these could be a good bet for your Isa top-up.

Kathryn Cooper is editor of the Money section