How to Invest in Bonds?

[samdaman]

Kia ora guys,

Interest rates just keep on going down so im looking to jump into bonds sometime soon. However, all the reading I've done on valuing bonds leaves me scratching my head when looking in the ASB bonds section. They're all traded in % rather than bond value.

Ive only ever been with ASB and don't know if this is the typical trading method but i was under the impression you bought a bond at a fave value with a coupon rate and then you recieve a maturity value as well.

I'm familiar with discounting and so on so i guess my question is. What are you buying from ASB? is it different with other brokers? And how do i interpret these values from ASB?

cheers guys,
Sam

[Buffett Jr]

Kia ora guys,

Interest rates just keep on going down so im looking to jump into bonds sometime soon. However, all the reading I've done on valuing bonds leaves me scratching my head when looking in the ASB bonds section. They're all traded in % rather than bond value.

Ive only ever been with ASB and don't know if this is the typical trading method but i was under the impression you bought a bond at a fave value with a coupon rate and then you recieve a maturity value as well.

I'm familiar with discounting and so on so i guess my question is. What are you buying from ASB? is it different with other brokers? And how do i interpret these values from ASB?

cheers guys,
Sam

Just phone up ASB Securities and ask.

[777]

I always thought the time to buy bonds was when interest rates were high. Then if interest rates dropped the bond would be worth more. The opposite allies if interest rates increase.

I stand to be corrected.

[Harvey Specter]

I always thought the time to buy bonds was when interest rates were high. Then if interest rates dropped the bond would be worth more. The opposite allies if interest rates increase.

I stand to be corrected.

you'll be standing a long time then.

[AppleCrumble]

That makes sense to me 777.

What I am trying to understand is why a company would offer bonds? For instance, Why is telecom looking to raise money through bonds?
What are the advantages/disadvantages for them? Why don't they just borrow the money from banks?


Spark considers $150 mln, seven-year retail bond offerhttp://www.scoop.co.nz/stories/BU151...bond-offer.htm



From my novice knowledge it seems that this is like a fixed term interest only loan. Spark get $150m and have 7 years to pay it back, plus what ever the rate is. They are talking about a rate of 3%. This seems low but I suppose this is of interest to some big institutes that want to offer that diversity in their funds. And am i right to say that 3% might be high as a cash rate right now?


I also see that 2Degrees shareholder is looking to extend the term of their bonds(US$450m) or issue fresh borrowings before then.
http://www.stuff.co.nz/business/indu...rom-regulators

http://www.stuff.co.nz/business/7347...m-bonds-mature


Ultimately is this what a company is doing when it is selling bonds? Lets, say a company raises money of say $100m at a rate of 3% and then go off and make a better return, 3%+, and then eventually go back and pay the $100m back plus the 3%? And then they make the margin and whatever other gains they can, whether that be newer technology producing more for them?

[kiwitrev]

The critical part of the puzzle is to understand how any particular bond is constructed. This applies in buying into a new issue or on the secondary market. Just because a bond at issue has a fixed coupon rate it can be a fallacy. The term of the bond doesn't necessarily mean that the coupon rate will endure for the whole of the term. In every instance one has to examine the "offer document" the bond issuer is required to make public when proposing any new bond offer. This will outline the parameters of how any bond can and will perform over time. They are not all 'born equal'. Many bonds will have a reset term (such as annually) allied to a particular formula for calculation of the coupon rate. The formula could be one of many adopted by issuers. It may contain a 'margin' (expressed in %) plus a swap rate (it may be any swap rate, 1yr,2yr,5yr for example) or even some other method for calculation. There are tools on the net for viewing swap rates(interest.co.nz). A good site to obtain info. is http://www.chrislee.co.nz/current-investments. Click on the pdf file for further detail. Coupon rates can change as a combination of a reset formula plus the neverending movement in interest rates (OCR) kick in. So the key is to understand what is in the offer document. Understanding the structure can be a convulated process and may take some time to get your head around. No one should buy into a bond without understanding the possible risks.

[Subway]

The Spark deal is a fixed rate bond, so there will be no reset (FYI most Bonds kiwitrev don't have a reset function). The rate hasn't been set yet but is likely to be 1-1.15% over the 7 year swap rate (perhaps 4.34-4.49%). ASB should be able to get you an allocation as CBA is a JLM on the deal.

[kiwitrev]

Well it doesn't help those without knowledge just to say MOST bonds don't have a reset function because some do. Just trying to point out to those seeking information of the different type of bonds on offer and some of the differences, the reset function being just an example. Perpetuals have their own particular quirks as another example. Caveat Empor.E=Subway;598355]The Spark deal is a fixed rate bond, so there will be no reset (FYI most Bonds kiwitrev don't have a reset function). The rate hasn't been set yet but is likely to be 1-1.15% over the 7 year swap rate (perhaps 4.34-4.49%). ASB should be able to get you an allocation as CBA is a JLM on the deal.[/QUOTE]

[Subway]

Well it doesn't help those without knowledge just to say MOST bonds don't have a reset function because some do. Just trying to point out to those seeking information of the different type of bonds on offer and some of the differences, the reset function being just an example. Perpetuals have their own particular quirks as another example. Caveat Empor.E=Subway;598355]The Spark deal is a fixed rate bond, so there will be no reset (FYI most Bonds kiwitrev don't have a reset function). The rate hasn't been set yet but is likely to be 1-1.15% over the 7 year swap rate (perhaps 4.34-4.49%). ASB should be able to get you an allocation as CBA is a JLM on the deal.

[/QUOTE]

You are quite correct that you should read the PDS/Terms Sheet of a deal, particularly with the emergence of the Bal3 Tier 2 issuance you will see more complex instruments hit the market (the Kiwibank Sub Notes spring to mind). Its good to point out the different types on the market, but to say "Many bonds will have a reset term (such as annually) allied to a particular formula for calculation of the coupon rate" is misleading, most do not. You can differentiate by looking to see whether they are a Floating Rate Note or FRN. There are plenty of vanilla corporate bonds on the secondary market. I haven't actually seen an FRN come to market in a while.