NZ Government Bonds

[peat]

http://www.raboplus.co.nz/raboplus-t...ecurities.aspx

What return does it offer?
The rate has yet to be set but is likely to be in the 9-9.25 per cent range for the first year. After that, the rate will be reset annually at a fixed margin over the one-year swap rate.

confirmed here on nzx as well
http://www.nzx.com/markets/NZDX/RBOH...tal-Securities

Rate re-set for Rabobank Capital Securities
The interest rate for the next 12 months was set today at 4.1230% reflecting the margin of 0.76% over the one year swap rate.

The interest rate will be reset annually on each 8 October until 2016 at the 0.76% margin over the prevailing one year swap rate. After that, the interest rate will be reset quarterly at the same margin over the prevailing 90-day bank bill rate

[Alan3285]

http://www.raboplus.co.nz/raboplus-t...ecurities.aspx

What return does it offer?
The rate has yet to be set but is likely to be in the 9-9.25 per cent range for the first year. After that, the rate will be reset annually at a fixed margin over the one-year swap rate.

confirmed here on nzx as well
http://www.nzx.com/markets/NZDX/RBOH...tal-Securities

Rate re-set for Rabobank Capital Securities
The interest rate for the next 12 months was set today at 4.1230% reflecting the margin of 0.76% over the one year swap rate.

The interest rate will be reset annually on each 8 October until 2016 at the 0.76% margin over the prevailing one year swap rate. After that, the interest rate will be reset quarterly at the same margin over the prevailing 90-day bank bill rate

ENP:

I suspect that also explains the difference between your numbers and mine. You were probably quoting the original (first year) interest rate, whereas probably I was using the one after the rate-reset.

Just goes to show how much they can change! Bear in mind also that the (capital) value of the bond will change as expectations of the 1 yr swap rate change (at least in theory).

Alan.

[ENP]

So the risks involved are:

- the interest rate may go down
- when you come to sell it, you may sell it for less than you payed for it

Where as with government and corporate bonds, the rate stays the same, but you may buy for more or less than the original when it was issued.

So if the 90 day bill interest rate goes up, the preference shares have to go up equally with it +0.76% ??

[ENP]

On the interest.co.nz website where it says the "minimum" investment amount of $5000, $10,000, etc is that just when they were first issued?

eg. If I only had $2000 to invest I could still buy them?

[Alan3285]

So the risks involved are:

- the interest rate may go down
- when you come to sell it, you may sell it for less than you payed for it

Where as with government and corporate bonds, the rate stays the same, but you may buy for more or less than the original when it was issued.

So if the 90 day bill interest rate goes up, the preference shares have to go up equally with it +0.76% ??

As far as I know, all current NZ Govt bonds are fixed rates for the full term (if anyone knows differently please do post here with details), so when you buy, you know exactly what yield you will get right to the end (assuming no default).

With the periodic-reset securities, the situation is more complex, since you might see a rise in 1 yr swaps come Oct 2010, and then you might be expecting 1 yr swaps to be lower for the next 20 years (just as an example).

If that was the case, the value might actually fall, even though the next reset could be upwards.

If you find any discussions on how to value periodic-reset securities, I would be very interested to see them since, as far as I know, there is no way to value them except to retreat to doing a DCF calculation out for a sufficiently long period of time, and make all the assumptions along the way.

On the interest.co.nz website where it says the "minimum" investment amount of $5000, $10,000, etc is that just when they were first issued?

eg. If I only had $2000 to invest I could still buy them?

On the question of minimum investments, I would expect that those apply right through the entire term of the bond. However, bear in mind that those are nominal amounts. If the current market value of a bond is $80 per $100 nominal, and the minimum investment is $5000 (nominal), then you would need to invest a minimum of $4,000 of your cash. Also, many bonds have limits along the lines of min = $5,000 and $1,000 thereafter, so you could buy $5,000 or $6,000, but not $3,000 (all nominal).

HTH,

Alan.

[ENP]

Ok great, thanks Alan you have been a big big help.

I'll try do a bit of google searching and see what I can find. I've just been comparing charts of historical term deposits vs government bonds and the government bonds don't seem to provide any better returns, sometimes they are lower. I though bonds were more risky than term deposits?

[Alan3285]

Ok great, thanks Alan you have been a big big help.

I'll try do a bit of google searching and see what I can find. I've just been comparing charts of historical term deposits vs government bonds and the government bonds don't seem to provide any better returns, sometimes they are lower. I though bonds were more risky than term deposits?

Not sure why that would be.

The risk with any bond really is default-risk. Either that they delay paying your interest, never pay it, and / or you don't get all your capital back.

I would imagine that the NZ Govt is less risky than most commercial banks that offer term deposits in NZ, and hence the rates from NZ Govt bonds should be lower.

I believe that many people would regard NZD Govt bond yields as being a proxy for the 'risk free rate of return' in NZD.


HTH,

Alan.


PS: You can always click on my 'reputation' icon on the posts that were helpful! I have no idea what it does, or whether I get a notification or anything, but I just noticed them myself, so I am wondering!

[ENP]

So when there is a "bull market" in bonds or the bonds yields "spike" does this mean the new listings will spike with initial offerings of higher % interests compared to what IPO ones are today?

Or does it mean lots of people will sell them for say $80 instead of $100 so the yields will "spike" upwards even though the initial % is the same?

[Alan3285]

Hi ENP,

So when there is a "bull market" in bonds or the bonds yields "spike" does this mean the new listings will spike with initial offerings of higher % interests compared to what IPO ones are today?

I will assume that by "bull market in bonds" you mean that the capital value is increasing (or, equivalently, the yields are dropping).

If so, then I would expect new issues to be at lower rates than previous issues (where capital values were lower, yields higher).

As a taxpayer, I certainly hope so!

Or does it mean lots of people will sell them for say $80 instead of $100 so the yields will "spike" upwards even though the initial % is the same?

So here we are talking about the secondary market?

If the capital value drops to $80 (from $100 previously), then the yield will rise. How much depends on how long the bond has to run to maturity.

If a 'bull market' is where the govt is able to issue bonds with a lower interest rate, then that is (I hope!) what they would do, and the issue price will be around $100 still.

I *believe* that the bonds are actually auctioned. So the govt offers say, bonds with a given maturity, paying X%.

Then I imagine that the players who are willing and able to bid, put in their bids for varying volumes / prices, and the govt then runs down the bids until they get to the point that the cumulative volume meets their requirement, and that sets the price they go for.

I could be wrong, but that's how most homogenous-stock auctions work I think.

Alan.

[ENP]

So "bear market rally" means to buy for $100 at say 6% government bond. Then sell 6 months later at $120?