The Best Pocket Guide Ever for Wealth-building Investment by Jillian Howard

Author:Jillian Howard
Language: eng
Format: epub
Publisher: Penguin Random House South Africa
Published: 2014-05-02T00:00:00+00:00

7

Bonds: are they better

than fixed deposits?

In a sense bonds are very similar to fixed deposits – you need a lump sum (you can’t add monthly amounts) to invest for a fixed period and interest is paid on your investment. The interest is taxed the same in both cases (‘tax-free’ up to a certain amount). One small advantage that savings bonds have over fixed deposits is that you can access the money ‘locked away’ for any period as long as you have already held it for 12 months. Of course, there will be penalties (aren’t there always if you renege on a promise?), but a bond in general is more liquid than a fixed deposit.

Who issues bonds, and why?

Fixed deposits are issued by a bank, but bonds are raised primarily by the government (the National Treasury), and also in lesser quanti­ties by local governments (municipal bonds), public enterprises and major corporations. Whereas banks will always allow you to deposit money with them (it’s their core business, after all), bonds are only raised by institutions periodically and for specific reasons.

RSA retail savings bonds (and the newish Nedbank retail savings bond) have been designed so that regular South Africans can invest and currently receive a slightly higher interest rate than is presently available from banks. Mostly, though, bonds are issued because the issuing party wants to raise finance for a project or to repay debt. As an example, the SA government raises bonds either to help finance the budget deficit or to influence their monetary policy (change in interest rates).

So a savings bond is, in fact, a loan to an institution and therefore has different rules and regulations when compared to a fixed deposit. For example, it is not transferable to a third party and so cannot be used as collateral for a loan (like a fixed deposit). The in­stitution promises to pay back your loan at a given future date and pay you interest as stipulated in the contract.

Since the RSA retail bonds are the most popular, let’s use them as an example of how bonds actually work.

RSA fixed-rate retail savings bonds

Traditionally, you would lend the Treasury an amount for a period of two, three or five years, with an option to keep reinvesting at the end of the term. You would earn market-related interest payable on the interest dates (twice a year only, unless you are over 60, in which case you can apply to receive monthly interest). This interest is set and guaranteed so that you know what your cash flow will be for the whole period. You can opt to have the interest reinvested until maturity instead – if you don’t need the income. The capital that you invested is the capital that is paid back to you. As with any cash deposit there is no capital growth, so inflation depreciates your original investment (capital). To counter this, our Treasury now offers a new type of bond.

Inflation-linked retail savings bonds

These have a three-, five- or 10-year period option and

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