Interest Rate Security Prices Bonds


The Commonwealth Bank issued a floating rate bond on 16 July with a maturity date of 12 July The interest rate is set at 3-month BBSW plus a fixed margin of %. The bond was issued for five years and pays quarterly interest.

Given the BBSW is 4. If you are on a very low tax rate such as a super fund in pension mode, you will get the franking credits refunded to you by the Tax Office after you submit that year's tax return which might be quite a long delay. They are a stapled security, one part being an unsecured subordinate note issued by the bank's New Zealand branch and the other being a preference share issued by the bank. Sitemap Contact Us Login.

Prices and research

The ASX listed fixed interest market now includes both hybrid securities (fixed interest securities with equity characteristics) fixed and floating rate securities and government securities.

If the company doesn't have the cash to pay your interest in one period, it's not obligated to make them up next payment period. Obviously, this favours the company. Typically the penalty for doing this, is that it can't pay any dividends on ordinary shares until it has re-instated payments on the notes but it still doesn't have to make up the missed payments.

Some securities have maturity dates, conversion dates, step up dates and others are perpetual. Ensure that you are aware of the dates and understand their significance. Some of these securities are very illiquid and thinly traded. This can mean that there are big gaps in prices and the yield you get on a security can be quite sensitive to differences in the price you pay. If a note is perpetual it must be sold on the market to redeem capital. Offers a fixed margin above a floating rate typically the BBSW and is reset for each payment period i.

So if interest rates rise, so do the number of dollars you get, conversely if interest rates fall, your payments reduce. Some rely on franking credits to achieve quoted rates of return and the value of franking credits is different for different investors. Generally more like ordinary shares as they are redeemed not by repayment of cash but by conversion to ordinary shares at a pre determined price face value some time in the future.

This type of security is anything that combines the elements of both debt and equity, although the definition is very broad. If the security is essentially a straightforward loan to an operating company, then you can form a view as to the credit worthiness of that company.

But if it is a construct from investment bankers then beware, because the underlying securities could be anything and may be highly geared in order to offer a high starting yield. This security exemplifies some of the dangers of seeking very high interest rates. Let's look at some of these securities to see the sort of issues to look for.

Note that the following examples are just short summaries of the terms and conditions for illustrative purposes. You should read the product disclosure statement for each security before investing. NABHA - floating rate note from one of the major banks. Interest is paid quarterly on 15th of February, May, August and November. To be entitled to a payment, you must buy them on the ASX 15 days before the due date. They were issued in June and are perpetual. The Bank has the right to redeem the note for face value plus accrued interest.

You have no right to redemption. Given the BBSW is 4. Given the current interest rates on offer from other banks, this note price is probably about what you would expect but there are certainly higher yields on offer. One thing to be aware of is that banks are regulated by APRA, and it is always concerned that ordinary depositors are protected. APRA considers that the more shareholder capital is present, then the more protected depositors are and it classifies this 'at risk' capital as Tier 1 and sets minimum levels for this.

When the banks issue interest bearing securities, they are only classified as Tier 1 if they are unsecured and banks frequently set the terms and conditions on these securities precisely to meet APRA's requirements.

If there were serious problems with the bank, the notes would translate to a preference share and your security would rank behind all other creditors, but ahead of ordinary shareholders. They mature in June and will be repaid on that date unless the company floats on the stock exchange in the interim in which case investors have the right to be repaid by the issue of shares in the initial public offering at a 2. Interest is paid quarterly on the 25th of March, June, September and December.

Although secured over the assets, these are formally unsecured. Events that may cause the suspension of payments are an inadequate debt service cover or a default on the senior debt. The issuer can redeem the notes at any point for the face value plus outstanding interest plus an additional amount which varies as time passes and whether the company has floated. This is a highly indebted company and a high risk security evidenced by the yield on offer.

If the level of debt proves too hard to manage, there are not a lot of assets left to secure these notes although having private investors ranked behind these might give some comfort. This value will vary over time as interest rates change. Total expected return from the bond portfolio, based on current bond prices and assuming no change in prevailing interest rates. This value will vary over time. Average Maturity yrs Average weighted by market value length of time until the current bonds in the portfolio mature.

For example, a Modified Duration of 0. Average Credit Rating Average credit rating for the bonds in the portfolio. Past performance is not an indicator of future performance. Returns are calculated in Australian dollars using net asset value per unit at the start and end of the specified period and do not reflect brokerage or the bid ask spread that investors incur when buying and selling units on the ASX.

Returns are after fund management costs, assume reinvestment of any distributions and do not take into account tax paid as an investor in the Fund. Returns for periods longer than one year are annualised.