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Cash And Fixed Interest

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These investments are generally made through an intermediary, such as a stockbroker (listed below). Apart from the fees, other complexities exist. The investments are difficult to understand and there may be a minimum investment of $10,000. Don't let that put you off, though, as bonds should be part of your investment portfolio; your adviser will be able to help you understand this particular investment option.

Although not shares, bonds are traded through the NZX Debt Market and, as such, are subject to the vagaries of demand and supply. When a bond is issued, it's issued at a face value, for example $10,000. It will pay a set interest rate, for example 7%. This is known as the coupon rate. If you buy a bond when it is first issued and hold it until maturity, it will be just like a term deposit. You'll receive your interest (at 7% in this example) and get your money back at the end of the investment term.
If, however, you buy or sell a bond during the term, the bond may be worth more or less than $10,000. This is because interest rates are always moving. If interest rates have fallen to 5%, the bond will be worth more than $10,000 because it will be paying interest of 7%. It may then be worth $12,000.You'll still only get 7% interest on the original face value of $10,000. The $700 interest on your investment of $12,000 represents a yield of 5.83%.

Notice, though, that if you're buying and selling bonds, you can make a capital gain or loss. You can, of course, avoid that by holding the bond until maturity. Larger private investors may be caught under the tax accruals rules. As with all tax discussions, please discuss your personal tax situation with your adviser.
Always check the maturity details on corporate bonds, as the company may have the option to issue shares in lieu of repaying the cash amount. You can just sell the shares, but it does add a little more uncertainty and complexity.

Craigs Investment Partners
ASB Securities
Direct Broking
First NZ Capital
NZX Debt Market

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