understanding bonds & cash Gina Neoh investment analyst

Transcription

1 understanding bonds & cash Gina Neoh investment analyst

2 equities are more visible

3 bonds & cash are important easier to see value for money high income & capital preservation less risky diversification liquidity

4 contents basics returns you can realistically expect drivers of return how bond prices are determined diversification international bonds and cash the impact of tax

5 what is a cash investment? short term IOU funds are lent or placed with institutions that pay interest for periods of less than 1 year cash investments are relatively risk-free

6 return on cash money market unit trust about 7.05% Availability within 48 hours the interest earned can vary depending on prevailing market conditions don t forget to shop around source: Business Day, Equinox

7 drivers of cash returns inflation drives the direction of interest rates

8 3 6% inflation target range oil price the Rand food prices prices give an indication of the balance between supply and demand

9 what drives cash returns inflation supply & demand creditworthiness of borrower time horizon

10 accessing the cash market your bank account bank fixed deposits money market unit trusts provident / retirement fund all upmarket versions of an IOU

11 a bit of history

12 gilts and the coupon

13 how a bond works R 150 R 100 R 50 R 0 (R 50) (R 100) (R 150) Mar Sep Mar Sep Mar Sep

14 bonds can be traded primary market secondary market because bonds can be traded capital gains and losses

15 yield & price R100, 5yr bond that pays interest Jan Feb Mar Apr prime 11.5% principal R100 capital 0% income yield

16 yield & price R100, 5yr bond that pays interest Jan Feb Mar Apr prime 11.5% principal R100 R97 capital 0% 3% income yield 14%

17 yield & price R100, 5yr bond that pays interest Jan Feb Mar Apr prime 11.5% 10.5% principal R100 R97 R103 capital 0% 3% -3% income yield 14% 8%

18 yield & price R100, 5yr bond that pays interest Jan Feb Mar Apr prime 11.5% 10.5% 15% principal R100 R97 R103 R89 capital 0% 3% 3% 12% income yield 14% 8% 23%

19 yield yield = = interest income + capital gain/loss if bond held to maturity

20 yield vs total return yield = = interest income + capital gain/loss if bond held to maturity total return = interest income + capital gain/loss

21 long bond yield source: I-Net

22 yield & price R100, 5yr bond that pays interest Jan Feb Mar Apr prime 11.5% 10.5% 15% principal R100 R97 R103 R89 capital 0% 3% 3% 12% income yield 14% 8% 23%

23 interest rates & inflation source: I-Net

24 inflation, interest rates, yield source: I-Net

25 yield & price R100, 5yr bond that pays interest Jan Feb Mar Apr prime 11.5% 10.5% 15% principal R100 R97 R103 R89 capital 0% 3% 3% 12% income yield 14% 8% 23%

26 capital gain/loss interest rates/yields prices a buyer wants to buy when prices are low (interest rates are high) a seller wants to sell when prices are high (interest rates are low) yield is the return you can expect if you buy now and hold till maturity interest earned is predetermined, stable, and makes up most of the return

27 learning points yield vs total return inflation, interest rates, yield price and yield interest earned is predetermined, stable, and makes up most of the return unlike equity exit price at maturity is predetermined

28 dividends from equity equity source: Andisa Securities

29 bond income is larger equity bonds source: Andisa Securities

30 bonds are also visible

31 bond issuance Retail/Cars Property Unsec Debt Banks Source : bondex

32 credit risk ability to repay loan ability to service debt performance of company is important to generate cash flows higher interest rates offered rating agencies

33 how other bonds work R 200 R 150 R 100 R 50 R 0 (R 50) (R 100) (R 150) Mar Sep Mar Sep Mar Sep

34 why are bonds & cash important? Value of R100 invested in December ,000,000 1,000,000 Equities Bonds Cash Inflation 6,634, ,000 10,000 38,806 17,671 10,045 1, Dec-24 Dec-27 Dec-30 Dec-33 Dec-36 Dec-39 Dec-42 Dec-45 Dec-48 Dec-51 Dec-54 Dec-57 Dec-60 Dec-63 Dec-66 Dec-69 Dec-72 Dec-75 Dec-78 Dec-81 Dec-84 Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 source: Firer & McLeod and I-Net

35 diversification

36 0% -5% -10% -15% -20% -25% -30% years when the equity market fell

37 0% -5% -10% -15% -20% -25% -30% years when the bond market fell

38 bonds can outperform equities source: Andisa Securities

39 a risk perspective action risk historical average return historical average return (after inflation) tax shares very risky 16.63% 10.66% CGT bonds risky 8.07% 2.09% interest cash not risky 6.75% 0.78% interest source: Firer & McLeod and I-Net

40 impact of tax R1000 initial investment in 1960 R 1,600,000 funds taxed at 18% R 1,400,000 equities R 1,200,000 R 1,000,000 bonds R 800,000 R 600,000 cash R 400,000 R 200,000 R 0 source: Andisa Securities

41 why invest overseas?

42 more diversification

43 more diversification different economy different currency different bond markets different industries globalisation

44 accessing the bond market unit trust funds, pension funds, endowment policies, retail bonds, broker active / passive / quants / high yield/ government only / duration financial advisor..

45 points to consider currency risk fees investment vehicles legislation tax understand the economics

46 thank you