Bluecare Insurance Brokers

An ideal investment vehicle for this rock 'n roll market
 


Today we're going to look at bonds. And no, I’m not talking about the type of bond you pay off every month for your house. (Although they do share a lot of surprising, and lucrative, similarities.)

This underused investment vehicle tends to work in the opposite direction of the market so, while global stock markets are hurtling to the floor, you could be investing in a vehicle that's shooting into orbit!

You become the bank!
 


Basically, a bond (also called a "gilt") is an IOU issued by the government or a large parastatal where you're the lender and the government or parastatal is the borrower. As far as the lender is concerned, a loan is a valuable asset to have. It pays a regular income (interest) during its life and, when it matures, you get the lump sum amount back. You just need to ensure the borrower's able to repay you.

So what can bonds offer your portfolio?


Well, to mention just a few: Your loan is secured and repaid at current par value (or "nominal" value) when the bond matures (be it two, three or five years). Unlike a traditional loan, you can buy and sell it like a regular share – unless you’ve invested in a SA Retail bond. And, they're not liable for capital gains tax, meaning you won't pay a levy on any profit you receive from their sale - although any interest earned is taxable.


The ABC of bond basics
 


The rate of a bond is known as a "coupon". Usually, you receive your coupon payment every six months at a fixed interest rate that’s in line with general interest rates at the date of issue. This makes bonds a good investment during times of high inflation, like we’re currently experiencing. Expressed as a percentage of the bonds par value, the coupon doesn't change, no matter how much interest rates rise or fall. And this makes the income you earn predictable!

I’ll give you an example to show you what I mean…

Here’s how it works…
 


Let’s say you’re investing in a 10.75% three year SA Retail Bond. The basic principle is simple and it’s all there in the name:

* Your interest rate, fixed at 10.75%, determines both the interest you receive and the redemption value.
* The redemption period is in three years. As the bond approaches its maturity or redemption date, its market price will tend to move ever closer to the R1,000 nominal value set when it was issued. 
* And, you’re lending the South African Government money. According to credit agencies (like Standard & Poors), our government is rated an “A”. This means it’s a safe and there isn’t a high risk of the government defaulting on your loan.

Once you’ve bought the bond, you know exactly how much you’ll be receiving in bi-annual interest payments.

What’s available out there?
 


Apart from fixed-income bonds, there are a host of more exotic instruments out there (like eurobonds or mortgage-backed bonds). Many of these are simply too expensive or unsuitable for private investors to even consider. So, the safest way to gain access to this market is through SA Retail bonds. And, they’re easy to invest in! You can purchase them from the RSA Retail bond website (www.rsaretailbonds.gov.za), your local post office or the National Treasury.

Alternatively, you can gain exposure to bonds by investing in a unit trust. For more information to put your investment plan in action call us at Bluecare Brokers