Payments and cashing in

Getting regular payments

Let's assume the company doesn't get into difficulty. In that case, holding on to the bond until it matures will mean that your return will exactly equal the "yield to maturity" of the bond at the time you bought it. The yield to maturity takes into account when the coupons (the "interest") get paid, how big they are, the amount you invested, and when the principal is due to be paid back.

Bernard Hickey

The yield to maturity is much the same as the interest rate on a term deposit. The yield to maturity can be quite different to the coupon rate (or "current yield"), so don't rely on the coupon rate as a guide to your return.

Tip: The greater the risk, the higher the return you should receive. The interest rate doesn't look as if it reflects the risk? Then avoid the investment.

Bernard Hickey (pictured right), editor at interest.co.nz, gets concerned when he looks at the returns offered on some of the riskier bonds - some of the rates offered aren't great when you take into account that bank bonds and deposits are currently government guaranteed.

Cashing in early

You need to think about whether you might need to get out of the bond before it matures.

Many company bonds can be bought and sold during their life - usually on the NZX debt market (NZDX). If you sell your bond before it matures you'll have to accept the market price for the bond and that might be less than you invested.

Many factors influence the price of a bond. But one of the most important is interest rates. If interest rates rise after you buy a bond, the market price of your bond will fall until its yield to maturity matches the yields in the rest of the market.

Anything and everything that affects interest rates can affect the value of your bond.

Rising inflation, concerns about the currency, bad news on the government's budget deficit, or a flood of new borrowing by companies and others ... these all have the potential to lower the value of your bond investment.

But a deeper-than-expected recession might increase the value of your bond - because interest rates are likely to become lower, making your bond more valuable.

All this matters only if you sell your bond early. It's similar to what happens when you break a term deposit early: if rates have risen since you invested, you pay a penalty to the bank (because they now have to borrow from someone else at a higher rate).

The price of a bond can also move sharply with news about it or a change in the financial markets' view of the company. For example: if the company can't renew other funding, its creditworthiness suffers and down goes the market price of its bond.

Tip: If there's a chance you might sell your bond before it expires, it's absolutely essential for you (or your adviser) to investigate the company thoroughly both before you buy the bond and during the life of the bond. You also need to regularly track the price of the bond.