Kiwi Bond
It is a kind of fixed-income security created and offered by the New Zealand government.
What Is Kiwi Bond?
A Kiwi Bond is a kind of fixed-income security created and offered by the New Zealand government. This security allows investors a purchase price ranging from a minimum of NZD$1,000 to a maximum of NZD$500,000 per issue.
When individuals redeem a Kiwi Bond, they are offered a fixed interest rate with a maturity period of anywhere from six months to four years.
Risk-averse investors often seek these bonds, who value financial security even though the relative return may be decreased. This financial security is guaranteed by a fixed rate of return set by the New Zealand government.
Although the term “Kiwi Bond” may seem atypical for the finance field, the name holds historical and cultural significance regarding New Zealand.
The national bird of New Zealand is called a kiwi. Inspired by this, the nickname “Kiwi”, which referred to New Zealand soldiers, sprung to life during World War I. Since then, the people of New Zealand have adopted and embraced the label, as it is not commonly used as a term for endearment.
The first Kiwi Bonds were issued in 1985 and intended to be the primary resource for small-budget investors.
The government of New Zealand has restrictions on Kiwi Bond investment. Only current residents of New Zealand are eligible to purchase these bonds.
Regardless of being New Zealand citizens, individuals living abroad are automatically excluded from purchasing these bonds.
Therefore, these bonds are unavailable to foreign investors due to their residential status.
Key Takeways
- Kiwi Bonds allow investors a purchase price from as low as NZD$1,000 and as high as NZD$500,000.
- Only current residents of New Zealand are eligible to purchase Kiwi Bonds.
- These bonds offer a fixed interest rate with a set maturity period of six months, one year, two years, and four years.
- These are fully secured and endorsed by the New Zealand government.
How Kiwi Bonds Work
Bonds issued by the government offer higher security than corporate bonds because government bodies are almost guaranteed to carry out their deals.
Kiwi Bonds are fully secured and endorsed by the New Zealand government, specifically the Crown, Her Majesty the Queen; therefore, buyers attracted to low-risk investments seek these sorts of bonds
Typically, governments issue bonds when they need to raise money. Whether for general day-to-day income, new government projects, or infrastructure repair.
Since Kiwi Bonds are typically considered safe investments, their interest rates are vastly lower than other bonds. However, there might be better options for investors looking for higher return rates.
This bond allows investors a purchase price as low as NZD$ 1,000 and as high as NZD$ 500,000.
When individuals redeem this bond, they are offered a fixed interest rate with a set maturity date of six months, one year, two years, and four years. Bondholders can redeem them on every maturity date or at any desired time.
Government bonds require seasonal interest rates, referred to as coupon payments.
The interest rates for Kiwi Bonds are regularly calculated based on the fluctuating averages of the national consumer price index and are assigned by the New Zealand Debt Management Office. Every three months, installments of interest dues must be paid.
When purchasing Kiwi Bonds directly from the Reserve Bank of New Zealand, also referred to as the central bank, there are no transaction fees, charges, or deductions.
However, a commission might be required if purchasing through a mediator, such as a bank, financial advisor, broker, or accountant.
In cases where the interest rate changes between the time a buyer puts in their application and the time said application is processed, the investor will be given a choice to accept the new rate offered or withdraw their application entirely.
This is because there is a possibility that the new interest rate may be lower than the one they initially intended to invest with.
Roughly four weeks before the maturity date, bondholders will be informed via mail or email, depending on the preference listed, of their awaiting maturity. Additionally, investors will be offered a reinvestment option based on that time’s terms, conditions, and requirements.
The deadline to apply for reinvestment is five days before the maturity date of the previous investment. If a reinvestment application is not received correctly, the bond’s principal amount will be paid immediately before the maturity date.
Investors must submit the Application as instructed on the form and may contact the Computershare Investor Center, New Zealand Debt Management's Registry (NZDM). More information is available on the Product Disclosure Statement.
Advantages and Disadvantages of Kiwi Bonds
Although these Bonds remain the primary option for investors residing in New Zealand, there is still discussion regarding the characteristics of the bond.
Advantages are:
- The risk associated with the investment of Kiwi Bonds is low.
- The bond guarantees return and provide investment security.
- The state of the New Zealand economy is highly stable with upward trajectory growth and is rarely interrupted.
- The Reserve Bank of New Zealand has earned global trust within the finance circle.
Disadvantages are:
- Kiwi Bonds typically issue a relatively low return rate.
- The bonds could be better for investors looking to make a significant profit over a short period.
- Only those actively residing in New Zealand are eligible to invest.
- Foreign investors can not purchase the bonds.
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