A retail bond offering allows a company to raise additional capital by borrowing at a fixed rate from an investor for a specific length of time. Companies typically issue retail bonds to expand their business, pay off debt, or fund a specific project, as with any capital raising.
Typical issues aim to generate £10m to £350m and can provide interest rates as high as 7%, though they are usually lower – an enticing proposition for investors at a time when even the best savings accounts are struggling to deliver acceptable yields.
What exactly is a retail bond?
In simple terms, a bond is an IOU issued by a company or a government to borrow money from you. They’ll also come with a promise or guarantee of the amount and time they’ll pay interest on the money you advance them, just like most IOUs.
When it comes to managing your investment portfolio, you may trade, purchase, and sell Bonds, making this one of the most exciting investment products.
Bonds can bring stability and diversification to your portfolio by having lower volatility than equities.
Are retail bonds a safe investment?
There isn’t any danger. Your money is safe since RSA Retail Savings Bonds cannot be used as collateral for any loan. Because RSA Retail Savings Bonds cannot be sold on the open market, you are protected from market risk. There is no reinvestment risk if you want to reinvest your interest.
Do bonds make monthly payments?
Bond funds often own a variety of separate bonds with varying maturities, reducing the impact of a single bond’s performance if the issuer fails to pay interest or principal. Broad market bond funds, for example, are diversified across bond sectors, giving investors exposure to corporate, US government, government agency, and mortgage-backed bonds. Most bond funds have modest investment minimums, so you may receive a lot more diversification for a lot less money than if you bought individual bonds.
Before making investment selections, professional portfolio managers and analysts have the expertise and technology to investigate bond issuers’ creditworthiness and analyze market data. Individual security analysis, sector allocation, and yield curve appraisal are used by fund managers to determine which stocks to buy and sell.
Bond funds allow you to acquire and sell fund shares on a daily basis. Bond funds also allow you to reinvest income dividends automatically and make additional investments at any time.
Most bond funds pay a monthly dividend, though the amount varies depending on market conditions. Bond funds may be a good choice for investors looking for a steady, consistent income stream because of this aspect. If you don’t want the monthly income, you can have your dividends automatically reinvested in one of several dividend choices.
Municipal bond funds are popular among investors who want to lower their tax burden. Although municipal bond yields are normally lower than taxable bond fund yields, some investors in higher tax brackets may find that a tax-free municipal bond fund investment, rather than a taxable bond fund investment, provides a better after-tax yield. In most cases, tax-free investments are not suited for tax-advantaged accounts like IRAs.
How do bonds get repaid?
When governments and enterprises need to raise funds, they issue bonds. You’re giving the issuer a loan when you buy a bond, and they pledge to pay you back the face value of the loan on a particular date, as well as periodic interest payments, usually twice a year.
Bonds issued by firms, unlike stocks, do not grant you ownership rights. So you won’t necessarily gain from the firm’s growth, but you also won’t notice much of a difference if the company isn’t doing so well
What are retail RSA bonds?
An RSA Retail Savings Bond is a government of South Africa investment that pays fixed or inflation-linked interest over a certain period of time. RSA Retail Savings Bonds are offered in the following forms:
- The Fixed Rate Retail Savings Bond series includes bonds with periods of two, three, and five years. Fixed Rate Retail Savings Bonds pay a market-related fixed interest rate on interest payment dates until the bond matures. Each of the maturities in the series has a different interest rate.
- The Inflation Linked Retail Savings Bond series includes bonds with maturities of three years, five years, and ten years. The principal invested in Inflation Linked Retail Savings Bonds is adjusted for inflation over the period, and a floating interest rate is paid every six months on interest payment dates.
The minimum investment amount is R1,000.00, while the maximum investment amount is R5 million.
- Directly at the National Treasury, 240 Madiba Street, Pretoria, on the corner of Thabo Sehume and Madiba Streets.
How do you go about purchasing retail bonds?
- Interest and capital are sent into your bank account instantly, making it a very safe way to invest.
- You’ll get an interest rate that’s in line with the market. The interest rate is constant for the entire investment time, so you’ll know precisely how much money you’ll have.
- You can opt to reinvest the money you earn at the same rate as your bond, ensuring that your capital grows at a guaranteed pace.
- When you invest in RSA Retail Bonds, there are no fees, commissions, or costs.
- The RSA Retail Bonds cannot be used as collateral for any loan, preserving the safety of your investment.
- The RSA Retail Bonds can’t be sold in the market, therefore you’re not subject to market risk.
- An RSA Retail Bond can be purchased electronically through the RSA Retail Bond website, or directly from the National Treasury or any Post Office branch, making it simple to invest.
- On the interest payment day, interest and capital are deposited straight into your bank account, ensuring no delays.
- The RSA Retail Bond was created specifically to assist you in taking charge of your own investment decisions.
- You may make an early withdrawal after 12 months if you have an urgent need for cash, but you will be charged a penalty.
What is the procedure for paying RSA retail bonds?
There are two types of bonds available: a fixed-interest option and a new inflation-linked bond that is inflation-protected.
The National Treasury created a retail bond to encourage households to start saving alongside businesses and government. It delivers guaranteed returns, may be purchased for as low as R1 000, and has no commission, agency, or service fees.
In addition, rather of investing through a third party, the Retail Bond allows investors to take management of their own savings portfolio. The RSA Retail Bonds offer competitive rates and perks similar to those offered by the government in the capital markets. Individuals, like enterprises and corporations, will now have access to those benefits.
Retail Savings Bonds promote personal economic empowerment by providing a safe and secure alternative investment instrument that provides consistent and reliable returns, as well as fostering healthy competition among investment instruments in the marketplace, all to the benefit of the individual investor.
The RSA Retail Savings Bonds’ simplicity and dependability should contribute to greater financial and economic knowledge in South Africa as a whole over time. As a result, South Africans from all socioeconomic backgrounds would have the opportunity to become financially empowered, a development that should encourage a savings culture and economic maturity.
Process
- Directly at the National Treasury, 240 Madiba Street, Pretoria, 0002 (Cnr Thabo Sehume and Madiba Street).
- On the interest payment date, both interest and capital are deposited straight into your bank account, ensuring no delays.
- Option for interest payments semi-annual or monthly payments (monthly repayments for over-60s only)
Do you have to pay taxes on your retail bonds?
Retail bonds are extremely safe because they are sold by the government through the National Treasury, and the government has a high credit quality rating. Interest generated on RSA Retail Bonds will be subject to the normal requirements of the Income Tax Act. A specific amount of interest earned is tax-free under this Act.
Is bond investing a wise idea in 2021?
Because the Federal Reserve reduced interest rates in reaction to the 2020 economic crisis and the following recession, bond interest rates were extremely low in 2021. If investors expect interest rates will climb in the next several years, they may choose to invest in bonds with short maturities.
A two-year Treasury bill, for example, pays a set interest rate and returns the principle invested in two years. If interest rates rise in 2023, the investor could reinvest the principle in a higher-rate bond at that time. If the same investor bought a 10-year Treasury note in 2021 and interest rates rose in the following years, the investor would miss out on the higher interest rates since they would be trapped with the lower-rate Treasury note. Investors can always sell a Treasury bond before it matures; however, there may be a gain or loss, meaning you may not receive your entire initial investment back.
Also, think about your risk tolerance. Investors frequently purchase Treasury bonds, notes, and shorter-term Treasury bills for their safety. If you believe that the broader markets are too hazardous and that your goal is to safeguard your wealth, despite the current low interest rates, you can choose a Treasury security. Treasury yields have been declining for several months, as shown in the graph below.
Bond investments, despite their low returns, can provide stability in the face of a turbulent equity portfolio. Whether or not you should buy a Treasury security is primarily determined by your risk appetite, time horizon, and financial objectives. When deciding whether to buy a bond or other investments, please seek the advice of a financial counselor or financial planner.