Bonds generally offer more stable returns and lower risks than investments such as property or shares. But some bonds are riskier than others. Make sure you understand these risks.
Before investing in bonds, check out our new bonds guide, Bond Voyage, to understand how they work and how to choose, buy and own bonds.
When you buy a bond, you’re lending money to a bond issuer - usually a government, council or company - for a set period of time (the term). The term is fixed by the issuer and can range between one and 30 years. They’re often known as ‘fixed interest’ investments. Learn about different types of bonds below.
|Asset-backed security||Backed by another asset, such as housing loans.|
|Corporate bond||Offered by listed or unlisted companies raising money.|
|Callable/redeemable bond||Can be bought back by the issuer. Investors will lose their interest payments once this happens.|
|Convertible/'coco's/hybrid bond/capital note||Can be converted into another type of security such as shares, or for cash, which can be worth much less than the sum you originally invested. The bond issuer may also be able to stop or limit the interest they pay. See more on capital notes.|
|Eurobond||An international bond issued in Euros, or in a currency not native to the country where it is issued. An example is a bond issued by a group of banks in Singapore, denominated in US dollars, sold to international investors. These are usually sold to institutional investors.|
|High yield bond||Also known as junk bonds, they offer investors high-interest payments but they are also high risk and have a high probability of payment default.|
|Investment grade bond||Issued by companies with a strong financial position.|
|Kauri bond||Issued in NZ dollars by overseas issuers.|
|Municipal bond||Issued by local government.|
|Perpetual bond||A bond with no fixed maturity date. However, issuers usually include an option to recall perpetual bonds when it suits them.|
|Putable/put bond||Allows investors to force the issuer to repurchase the bond at set dates before the bond matures. Can be beneficial if investors expect interest rates to rise and the value of bonds to fall.|
|Redeemable/callable bond||Can be bought back early by the issuer, at a price fixed by them. This usually happens when the issuer finds they can get a cheaper loan elsewhere.|
|Secured bond||Secured against an income stream, or an asset. Considered less risky than an unsecured bond.|
|Senior bond||Ranked higher in an issuer’s repayment list if they face financial difficulty.|
|Subordinated bond||Ranked low in an issuer’s repayment list if they face financial difficulty.|
|Unsecured bond||Not backed by any collateral or asset. Unsecured bondholders are paid after secured bondholders when a company repays its debts.|
|Uridashi bond||Issued outside of New Zealand in a high yield currency (such as the NZ dollar), and sold to Japanese investors.|
|Zero-coupon bond||Doesn’t pay interest (a coupon) like other bonds. Instead, you will receive a discount when you purchase the bond and hope you make a profit when the bond is redeemed at maturity. Zero-coupon bonds tend to go up and down in price a lot more than regular coupon bonds.|
Bonds are also known as fixed-interest investments. They are an income asset as you’ll receive income if you hold the bond until maturity.
You’ll get interest plus the original value of your bond.
The bond’s interest rate, also known as a coupon, is fixed at the time of issue. Interest is paid over the bond’s lifespan. At the maturity date, you’ll also be paid the face value of the bond.
Use comparison websites to see how your bond is returning relative to other similar bonds.
Websites like interest.co.nz publish bond rates.
The yield tells you the performance of a bond.
You can measure the performance of a bond by working out the amount of return you’ll get compared to what you paid. This measure is known as the yield and is calculated by dividing the interest received by the last traded price of the bond. Note that bonds aren’t always traded at face value.
Websites like www.interest.co.nz list current New Zealand bond yields. Your adviser or broker should have information about how to review the performance of bonds from other countries.
If you buy a $1,000 bond with a 10% coupon rate, you are agreeing to receive $100 in interest or a 10% yield.
If interest rates rise, other bonds will come onto the market with higher coupon rates. So your bond may be competing with a $1,000 bond with a 12% coupon rate, which is a 12% yield.
To get a higher yield from your bond, buyers will offer less for it. If they buy at $800, for example, they will still get your $100 interest, which is a 12.5% yield.
Companies issuing bonds must follow disclosure rules. They must have a licensed supervisor who checks they continue to meet their obligations. While some bonds are low risk (eg NZ Government Bonds), others have features that make them a much higher risk.
Check the issue date
Pricing and other key features may differ from what is disclosed if the bond you’re thinking about buying is not new to the market. Key information contained in the product disclosure statement (PDS) may have changed since it was first issued.
Credit ratings are only an initial assessment of risk.
Credit ratings help you understand how likely it is you’ll get your money back at maturity, and that interest will be paid on time. Ratings are issued by independent agencies such as Standard & Poor’s, Moody’s and Fitch.
Be aware that these agencies have different credit rating systems, and they’re only one factor you need to consider. Also, be aware that the credit rating doesn’t always apply to the bond issuer. It can apply to the bond itself or to the issuer’s holding company – or there may be no credit rating. See our credit ratings page.
High risk bonds
Some bonds have features that make them higher risk.
The fees charged will vary depending on the type of service you choose.
Some bonds are issued direct to retail investors. In that case, there will be no fee to pay to purchase the bond.
After the initial issue, bonds are bought and sold through a broker, or an online dealing service. The fees charged will vary depending on the type of service you choose. You will pay a minimum brokerage fee for each order placed and may have to pay a percentage fee for any amount over the minimum.
New bond offers can be seen on Smart Investor. You can only buy bonds through a broker or online dealing service.
Read the product disclosure statement (PDS)
Our guide to product disclosure statements has an example of the key information summary for a bond.
Do extra research if the bond is not new to the market
Key information contained in the product disclosure statement (PDS) may have changed since it was first issued. A financial adviser or broker will be able to provide more current information.
Check you can sell your bond easily if you need to
You can usually sell listed bonds by trading on bond markets, such as the NZX Debt Market.
If a bond’s listed, you’ll see its value and the number of trades. The more trades there are, the easier it’s likely to be to sell your bonds. A market with few potential buyers means you could struggle to sell your bonds at a reasonable price.
If a bond’s not listed, you’ll need to take extra care to determine whether the price being charged is appropriate. Check the financial information in the PDS and on the bond register entry and seek professional advice if necessary.
Choosing different types of bonds increases the chance that some will perform well when others don’t. Consider bonds that fit your financial goals and appetite for risk. This could include a mix of government and corporate bonds, bonds that mature at different times, or more complex bonds.
Bond laddering, or choosing bonds with different maturity dates gives you access to cash at different times. It also reduces the chance that all your bonds mature at a time when interest rates may be high and yields are low - which reduces the money you’ll make on your investment. More about diversifying.
Bond issuers are required to produce financial statements each year.
Financials in the annual report
You will find the report on the company website or on the government’s companies office website. Our guide to reading company annual reports will help you understand how to interpret these reports.
Credit rating changes
Credit downgrades may be a sign you are less likely to get your money back at maturity, or that interest will be paid on time.