Bonds
Information updated as at 10 April-2024 | NZX Debt Market https://www.nzx.com/markets/nzdx/
Buying Bonds in NZ. Common alternatives:
KiwiSaver
Managed Funds and ETF's
Brokers include ASB Securities | Direct Broking | Craigs Investment Partners | Forsyth Barr
NZ Government | For NZ residents and citizens, can buy Kiwi Bonds directly from the Kiwi Bond registrar
Bonds can be:
issued by the New Zealand Government or local authorities
issued by New Zealand firms traded on the New Zealand Debt Securities Market (NZDX)
issued by New Zealand firms with at least a BBB- or equivalent rating from an internationally recognised credit rating agency, for example, Standard and Poor's
issued by New Zealand registered banks
in finance companies.
Understanding Bonds | Common Terms:
Face value (also know as Par Value). This value does not change.
Market Value will change based on market changes in
a) Interest rates: Market value has an inverse relationship to the movement in interest rates. The higher the interest rate change, the bigger the discount to face value. This reflect that new bonds will be issued with a higher coupon rate making the existing bonds less attractive. The converse is true.
b) Issuers credit risk profile: Higher the risk the bigger the discount
c) Time to maturity : Closer to maturity, the less of a discount the market value will be to the face value. This is the investors risk of not receiving their money reduces the closer to maturity it is.
The coupon rate is the % return based on the par value of a bond. This rate is fixed over the lifetime of the bond.
The current yield compares the coupon rate to the current market price of the bond.
Understanding Bonds | Examples
Example 1: if a $1,000 bond with a 6% coupon rate sells for $1,000, then the current yield is also 6%. However, because the market price of bonds can fluctuate, it may be possible to purchase this bond for a price that is above or below $1,000.
Example 2: if an investor buys a 6% coupon rate bond (with a par value of $1,000) for a discount of $900, the investor earns an annual interest income of ($1,000 X 6%), or $60. The current yield is ($60) / ($900), or 6.67%. You will get the $900 on maturity you invested with the $60 per annum interest.
Example 3: You have been offered a bond with a face value of $1,000, and a coupon rate of 6%. The yield % quoted on issue is 6.67%. This means that the market value you have purchased the bond at is $900 i.e. at a discount.
Understanding Bonds | Useful Formulas
YR = ((D/ YTM)/ FV) + CR
YTM = (D/(YR-CR))/ FV
** Abbreviations a) Years to Maturity (YTM) b) Yield Rate (YR) c) Coupon Rate (CR) d) Discount (D) = Face Value (FV) - Market Value (MV)