Fixed interest securities

Fixed interest securities are like IOUs, with interest

Fixed interest securities are debt investments that pay a fixed or floating rate of return. When the government or a company wants to raise funds, they can issue bonds to investors as an alternative form of funding. The bond is like an IOU. As an investor, you are lending money to the issuer. You buy or invest in a bond and in return, the issuer intends to pay you interest and repay you in full at a date in the future. This highlights the key difference between fixed interest securities and shares. When you buy a share in a company you own a small part of that company, when you buy fixed interest securities, you become a lender to that issuer.

They are intended to provide a fixed income for a set time

The bond’s annual interest is generally paid to you as income on a regular basis. It is not reinvested. For example, if you buy a bond with a $10,000 face value today with a 10% coupon rate and maturity in 5 years’ time, you are agreeing to receive $1,000 in interest each year (or a 10%p.a. interest rate) for the next 5 years. The interest (or coupon) is generally paid to you on a quarterly or semi-annual basis, providing you with a regular income stream. It is also intended that the issuer will pay back the $10,000 face value at maturity (in 5 years' time).

You buy and sell through a stock broker

You don’t have to keep bonds for the full term; you can trade them on the market if there is an investor willing to buy. The market price of your bonds will fluctuate but the coupon payment will generally remain the same.

You can also invest in fixed interest securities when they’re first issued.

Trading may be available through the New Zealand Debt Market (NZDX) for listed securities or through the unlisted (‘over-the-counter’) market. Fixed interest securities are traded and settled in a similar way to shares, so you’ll need a stock broker such as ASB Securities to buy and sell them (fees apply).