Bonds less risky option

Q: We are a lower income couple in our earlier sixties with a mortgage-free home and modest savings towards our retirement.

We understand the importance of having our assets diversified but we are still not clear about the place of bonds.

Kiwi Bonds pay 6 per cent but $10,000 on term deposit at a bank has a return of about 6.95 per cent.

Could you explain what the advantage would be to have some investments in bonds as well as term deposits? (We do have other types of investments besides term deposits.)

A: There are two main advantages: most bonds pay higher returns than term deposits and you can sell bonds if you want to get out early.

Kiwi Bonds are just one type of bond. They are issued by the Government and are, therefore, regarded as the lowest-risk type of investment around, so they pay low interest.

For a list of some other types of bonds, see the end of the share listings in the Business Herald each day, under "NZDX Market".

At about the same level of risk as bank term deposits are bonds issued by local authorities, such as Auckland City, or SOEs, such as Transpower.

There are, however, other bonds issued by companies, such as Auckland International Airport and Fletcher Building Finance.

These are riskier and, therefore, have to pay higher interest to borrow money from you. Still, a company's bonds are less risky than its shares. If it gets into financial trouble, it must repay all bondholders before shareholders get anything.

You can get an idea of how likely it is that a company will get into trouble by its credit rating. One place to see the ratings is on www.interest.co.nz. Click on Money Market.

Ratings of AAA or G1 are best. The website gives you more information about ratings under its Consumer Guide.

It's obviously safest to go with high-rated bonds. And it's also best to spread your money over lots of different companies, just in case.

As I said, one big advantage of bonds over term deposits is that, if you want to get your money out before maturity, you can sell the bond.

And while many bonds have five-year terms, if you want to tie up your money for a shorter period, you can buy one that is already part-way through its term.

If you buy or sell part-way through, you'll find the price will be higher or lower than the original price - depending on whether interest rates have gone up or down in the meantime.

But that's not as complicated as it sounds. It just means that you should get a fair return on your investment for the risk you're taking, given the level of market interest rates at the time you buy or sell.

If you buy part-way through, you also need to understand the difference between the coupon rate and the buy yield.

The coupon rate is the interest paid to those who buy when the bond is first issued. The buy yield is the interest you get if you buy later, which takes into account the fact that you have paid a different price from the original price.

Head spinning? Bonds are simple if you buy at the start and hold to maturity, which most people do.

A good stockbroker or financial adviser can explain bonds to you. They can be an excellent lowish-risk investment for those approaching retirement and in retirement.

Q: In the answer to a question in the paper last week you mentioned that a website called www.interest.co.nz was the place to get home loan and deposit rate information.

There is another site which I would suggest presents information in a more user-friendly manner, namely: www.goodreturns.co.nz and its sister site www.depositrates.co.nz

Why do I say this? With home loan rates:

* Users can sort rates by term from highest to lowest and vice versa.

* They can do historical comparisons of home loan rates.

* They have access to original stories on what is happening in the home loan market place.

* They can join up to either a daily or weekly email newsletter.

Many (but not all) of the same options are available with deposit rates at www.depositrates.co.nz.

The site works a little differently from the home loans one as it uses a calculator where a reader calls up rates for a specific amount and term.

Once this is done, the table can be sorted by term, type, rate, institution and rating.

I would argue that presenting information this way is of far more use to readers than large tables ordered by institution types.

A: I wonder why you're so keen on these sites. It wouldn't have anything to do with the fact that you run them, would it? Good on you.

I don't entirely agree that your presentation is more useful. A while back, when I was putting money into a term deposit, I tried your website and found I had to choose a term before I got the info.

I was, however, flexible about how long I tied up the money. It depended to some extent on what interest rates were offered for different periods.

In the end, I found it easier to go back to www.interest.co.nz, which gives the interest rates for all terms of less than a year on one page and for a year or more on another.

Of course, not everyone is flexible about terms, but I suspect many are.

While I'm being critical, I think you may have got a bit carried away with the options on your site.

Does anybody really want to arrange a list of mortgage rates with the highest rate first? Or list term deposit institutions backwards alphabetically, from Z to A?

Still, your site has some great features, such as the ability to rank deposit rates with the highest first and mortgages with the lowest first. One feature I really like is the ability to graph several different mortgage lenders' rates back during the past few years.

When you're choosing a floating rate mortgage, if you simply go for the cheapest lender at the time, they might have just lowered their rates. But, in the long term, they may tend to have higher rates than some other lenders.

All in all, it seems to me that your site and www.interest.co.nz complement one another, with each one offering features that the other one lacks.

A couple of final points:

* The people who run this website also point out that interest rates, supplied by interest.co.nz, are available on here.

In the Money section, click on Current Interest Rates near the top of the page.

* You may have noticed that I again recommended www.interest.co.nz in the answer above.

I don't have shares in that company. I don't even know anything about the man who runs it. It's just that I find myself using that site often.