Bond Market Basics

Here is an interesting presentation that talks about bond risk and presents some tactical options for holding bonds in the NZ market:

http://www.nzfunds.co.nz/docs/Corpor...t_required.pdf

Very interesting but on page 9 of that article it states that the core income portfolio return of 5% for the 12mths to 30/06/2010 was after portfolio fees and expenses, but before any advisory fees or investor tax.It seems to be set up for NZ Funds and not ma and pa average. I would have thought most investors buying bonds or any interest instruments hoped for income primarily.

It takes some fortitude to learn from such a one-sided / biased presentation - they are, after all, just trying to persuade you not to DIY.
You can also learn more about bond market basics (and strategies) by googling it (most are US descriptions. Start with Investopedia)

no one knows the future but any guesses as to what interest rates are going to do. Words from Chairman Ben of tapering have got them rising but aren't we following Japan. That would mean low interest rates indefinitely. Central Banks won't let interest rates rise will they. The last thing a country needs is a higher interest rate and a resulting increase in their currency as people invest. Also they seemed committed to helping the borrowers and destroying the savers. Maybe we have turned the corner and rates might rise slowly from here. Any thoughts.

I have looked at ASB fixed interest report and savings rates are roughly 3%1yr 5%5yr but that 2% difference is probably just to cover the time risk of having your money tied up rather than an indication of an increase over time.

How far in front of the coupon date do I need to buy a bond in order to receive the payment. Is it like ex-dividend dates with shares.

Eg. a bond has 7 months to go. It pays a coupon every 6 months. If it pays the coupon on the 5th November (such as FBI050, Fletcher Building) when is the latest I can purchase the bond and still receive the Nov 5 coupon?

Unlike shares that have a declared dividend, bond prices include accrued interest in the price, so you will be paying interest to the seller, then collecting it on the coupon date.

but to answer your question, ex date should be 1 Nov, record date 4 Nov, paid 15 Nov, but wait for Company to announce the dates

I'm looking to purchase TPW060 Trust Power Bonds.

I've got a term deposit finishing on the 4th November so timing is ideal. I'm intending to buy 10,000 worth and hold to maturity in March next year.

Main reason for this, is to earn a little bit more interest on it and learn a bit more about the bond market and how it functions. I require the funds in April next year so it works out well.

So if I want to buy the minimum holding of 10,000, the price is currently $101.447. The initial coupon was 8.5%. Since I'm going to collect 2x quarterly payments, I'll get $212.50 in November and then get another coupon of $212.50 in March as well as the $10,000 for the principal of the bond back at the end of it in one cheque of $10,212.50.

Is this correct?

Also, since I've essentially had a capital loss of $144.70, how do I show this on my end of year tax return? Can I claim this back? I have my investments through my own company so will do a business tax return.

I assume you are a personal holder (ie not a trust or company), then your tax calaculation is to add up all you got in (both principal and interest) over the life of the holding, and subtract what you paid. this is your total taxable income. Subtract the gross taxable income you have already returned ( the coupons), the balance is your taxable income for the final period. this metod also applies to proceeds of any pre maturity sale of the bonds

I assume you are a personal holder (ie not a trust or company), then your tax calaculation is to add up all you got in (both principal and interest) over the life of the holding, and subtract what you paid. this is your total taxable income. Subtract the gross taxable income you have already returned ( the coupons), the balance is your taxable income for the final period. this metod also applies to proceeds of any pre maturity sale of the bonds

Sound advice
http://www.nzherald.co.nz/opinion/ne...ectid=11350090

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Originally Posted by kiora

Sound advice
http://www.nzherald.co.nz/opinion/ne...ectid=11350090

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I'm new to bonds having focused on shares up to now. Looking at retirement in 10-15 years time and trying to work out how to invest in bonds. Seems much more complicated than shares!

Anyway, am I correct in reading this quoted article that:

"all you need to do is ... concentrate most of your bond portfolio in high quality bonds issued by SOE's, city councils and banks with the latter limited perhaps to a maximum of 30 per cent of your bond portfolio. You need to have some short, medium and long bonds. "

So I just invest in bonds from reputable organisations and ladder them. Ignore everything else - don't worry about valuing the bond etc.

Yes I would keep it that simple. Buy a good bond collect the interest and hold it until maturity or sell it if it is no longer good. Not complicated.

one needs to distinguish true bonds, from the various Notes that have recently been issued from (mainly) the banks. These are a lot more complex due to various factors such as redemption, reset, extended duration, and subordination.

Yes I like mine stirred not shaken.

Some of the Perpetuals listed out there present and opportunity to capture value if interest rates rise eg the IFT bonds linked to the one year swap rate + a margin of 1.5%pa.. looks like they're currently priced to pay around 5.5% If you think short term rates have bottomed out you could gain on any upside in the future..

I mention this as anyone thinking of constructing a bond portfolio may want to balance out their fixed interest positions with something like these instruments...

Any thoughts?

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Originally Posted by huxley

Some of the Perpetuals listed out there present and opportunity to capture value if interest rates rise eg the IFT bonds linked to the one year swap rate + a margin of 1.5%pa.. looks like they're currently priced to pay around 5.5% If you think short term rates have bottomed out you could gain on any upside in the future..

I mention this as anyone thinking of constructing a bond portfolio may want to balance out their fixed interest positions with something like these instruments...

Any thoughts?

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That's pretty much how I use IFTHA. An inflation hedge. You buy 'em cheap, which gives an acceptable return, but if rates rise, the coupon rate rises too.

The "buy 'em cheap" part is important. I'd hate to be one of the poor b*ggers who went into these at time of issue.

we're currently offering some long dated bonds at 5.7% but despite their maturity out in the 2040's they reset every 5 years at a margin above the 5Yr swap rate and the issuer offers a resale facility and IF they dont find a buyer for your bond at the reset date (or choose to redeem it themselves) then there is another margin applied to the yield

I actually consider this as a pretty good option for gaining a higher yield - sure they are subordinated and unsecured - but the duration risk is for all practical purposes only for 5 years.