Common Fixed Interest Investments

When it comes to fixed interest investing, there are a number of investment options. The actual terms of an investment are detailed in the prospectus and/or the investment statement. A title e.g. “debenture”, only provides a few clues about what to expect. 

Term Deposit: This is an unsecured loan (investment), typically with a bank or credit union. A fixed rate of interest is paid either quarterly or at maturity. Term Deposits cannot be bought or sold prior to maturity; however they may be broken with penalties applying.

Debenture: This is acertificate of acceptance for a loan issued in the borrowing company's name that carries an undertaking that the debenture holder will get a fixed return (interest) and the principal amount repaid when the debenture matures. Interest can be paid out or compounded. As many New Zealanders have experienced to their dismay, many are high risk investments with little effective security.

Bond: This is adebt security, in which the issuer of a bond owes the holders a debt and is obligated to pay interest (coupons) on defined intervals and to repay the principal at a later date (Maturity). Bonds are usually unsecured. They may be listed on various secondary markets (eg NZDX). In general the larger the issue, the greater the liquidity for secondary market sales. Bonds may be rated by ratings agencies such as Standard and Poor’s or Moodys. The higher the rating, the lower the expected investment risk.

Capital Note: These areunsecured, subordinated fixed interest debt securities. These have no defined maturity date, instead having election dates when rollover terms will be offered. If the rollover terms aren't acceptable a note holder may elect to convert to ordinary shares in the company (and sell if desired). The company has the option to pay out cash instead of converting to ordinary shares under such an election. 

Preference Share: These are unsecured securities, legally recognised as shares (equity) on a balance sheet, and often carry terms that allows conversion to ordinary shares under certain conditions but they are very different from ordinary shares. They are regarded as hybrids of debt and equity. Dividends on preference shares have to be paid before dividends on ordinary shares. Preference shareholders have a higher priority if a company is liquidated than ordinary shareholders, although a lower priority than debt holders.

Mandatory Convertible Note: These areinvestments that pay a fixed rate of return for a defined number of years before then converting into ordinary shares of the business. They do not mature and will not be repaid. They can usually be traded on the secondary market so there is some liquidity.

Bond Funds:These are managed funds with the majority of those being sold in New Zealand structured as PIE investments which can be advantageous to investors on higher marginal tax rates. Most bond fund managers use active management in order to try and maximise returns. The main advantages that bond funds have over direct bond investing are diversification, duration management and interest rate management. There is also liquidity. Bond funds do not normally provide a known rate of return.

So which of these are most suitable for you to invest in? Everyone’s needs and expectations are different, so these should be discussed with an adviser prior to investing.