 |
 |
 |
 |
 |
 | ||||
Market crash turns heroes into villains ... Penalty rates on 100% bonds hit property... A most effective tax-saving strateg... When a pension is a safer bet than a lum... Fixed interest rates make gilts suscepti... Home owners dance the repo ji... Turning a microwave into a home ban... Watching your back on demutualisatio... What to do if the retrenchment blues soc... Bargain-basement asset transfer... New unit trusts defy bear market tren... Coronation returns to market favou... |
Fixed interest rates make gilts susceptible to market movesIF YOU have money invested in a bond unit trust fund, you may be wondering why interest rate hikes have a negative impact on bonds. Lara Warburton, marketing manager of RMB Unit Trusts, explains: A gilt is a debt paper issued by the government or a parastatal wanting to raise capital for a specific project. The length of time over which the money is required will determine the term of the gilt (hence there are short-, medium- and long-dated gilts). The purchaser of the gilt receives a fixed-interest income (or coupon) which is usually paid twice a year. If the gilt is held until it matures, the owner receives the nominal or face value of the gilt back (usually R1-million). As the interest paid is fixed, gilts that pay less interest than other investments become unattractive and demand for them declines. This affects the rand price of these gilts, which then drops to a level where the interest payable relative to the price paid represents a market-related interest rate to the investor. This relationship is the yield. Thus, as interest rates rise, the value of gilts fall. Longer-dated gilts will be more susceptible to interest rate movements. This is because there are more interest payments to maturity, and longer to wait until the face value is repaid. The main benefits of investing in a gilt fund include:
|