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Direct Bonds Explained

Bonds are normally issued by either a government or a business. The purpose of the bonds is to raise capital for themselves.
The characteristics of a "bond" is as follows:

  • Each bond is for a specified amount. This is known as the "principal". This is the amount that is being "borrowed".

  • The coupon rate is used in this instance. This is the interest rate.

  • The repayment date. Which is called the "maturity" date. This is the point whereby the "principal" (the amount originally borrowed) will be repaid.

  • There is normally a requirement of a minimum holding time and a minimum parcel size.

Risk, with regards to purchasing bonds, is linked to the quality of the security (EG bonds issued by the USA government would be considered less of a risk than bonds issued by the government of Zimbabwe) and then also the term of how long the principal of the bond is.
A share brokerage will trade in bonds. The brokerage will charge a transaction fee which will be the difference between what the brokerage pays and what it sells for. This is also referred to as a "mark up".
In New Zealand, the bond market is active on the NZDX. This makes them relatively liquid. The most active bonds in New Zealand are the New Zealand government bonds, The corporate bonds in the New Zealand market are less liquid but usually provide better yields (returns).

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