Guide-to-Fixed-Interest - A Guide to Fixed Interest...

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A Guide to Fixed Interest
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Fixed interest investments offer a range of products that are intended to provide investors with regular known cash flows and funds repaid on maturity. Since the deregulation of New Zealand’s financial markets in the mid-1980’s, the domestic debt market has developed steadily, and now provides retail investors with opportunities to invest in fixed interest products that expand beyond bank term deposits and savings accounts. Debt instruments originate from the Government, Local Authority and corporate sectors’ requirement for funds. The securities represent a contractual claim on an issuer (the borrower) to make specified payments such as periodic interest payments and principal repayments over a defined period. Existing debt instruments can be bought and sold in the secondary market providing investors with liquidity and the ability to restructure portfolios in line with changing preferences for risk and return. The exception to this is Bank term deposits and Debentures which are not negotiable, although with the consent of the Issuer and usually with a penalty, they may be repaid ahead of the due date. In contrast to equities where dividend payments are not guaranteed and there is no maturity date, debt products provide the holder with known cash flows and (generally) a maturity date when the principal invested will be repaid in accordance with the terms of the contract. Debt securities entitle the holders to a priority claim over equity holders to the profits of the borrower, and rank ahead of equity holders for payments in the event of liquidation. Instruments Traded 1 Transaction Costs 4 What are the Risks? 5 Rating Definitions 6 How Fixed Interest is Priced 7 Taxation 7 Common Fixed Interest Terminology 7 Who are we? 9 Contents What is Fixed Interest?
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1 The fixed interest market consists of many different instruments. Term Deposits Government Stock Local Authority Stock or Bonds Corporate Bonds Step-up Securities PIE’s (Portfolio investment entities) Capital Notes Capital Bonds Redeemable Preference Shares Perpetual Preference Shares Convertible Notes Debentures Term deposits: Are typically placed with banks. Investment amount, term, interest rate and payment dates are agreed on investment. There is not usually brokerage or fees charged for the investment. Secondary Market: Term deposits are non-negotiable and early repayment will only be with the consent of the bank. There may be penalties in the form of reduced interest earned in this situation. Government Stock (NZGS): Is tendered initially in institutional size parcels, with retail parcels being created by banks and other financial institutions in the secondary market. The Crown is considered the most credit-worthy entity in New Zealand as it can meet its obligations through its ability to raise revenue from taxation. Thus, interest rates on all securities issued by the Crown are lower than those of similar securities issued by non-Government organisations. Government bonds are the
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