NZX Debt Exchange
The New Zealand Stock Exchange (NZX) has several components. It has the NZX Main Board, the NZX Debt Market, the NZX Dairy Derivatives, the NZX Equity Derivatives, and the Fonterra Shareholders' Market. The purpose of the NZX is to provide a marketplace where the exchange's listed equities and funds can be traded.
What is NZDX?
The NZX Debt Market (NZDX) is a part of the NZX and is the main market for listed debt securities, providing access to a diverse range of New Zealand and Asia-Pacific corporate and government debt. Products listed on the debt exchange include both retail and wholesale debt facilities.
What securities are listed on it?
The most important securities listed on the NZDX include Government and corporate bonds and they are considered to be the safest investments in markets. Investing in a bond essentially means that you are lending money to a company or government on fixed income rates.
Bonds or debt instruments provide security to the investors though not high returns as equities. But there is a security of a certain return on a regular basis. The bond markets usually do well when the stock market becomes volatile and interest rates fall.
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Debt versus Equity
Debt means an investor lends money to be repaid along with interest. Equity means raising money by selling interests in the company. Basically, a company decides whether it wants to take a loan or give shareholders stocks in it. In debt financing, money has to be repaid, in equity financing, the money is not repaid to the investors by the company, but they get a return through trading.
Therefore, the debt markets/securities are less risky as compared to equity but the returns are also relatively smaller. In New Zealand, while the NZX deals with equity, the NZDX deals with debt. An investor can have both debt and equity in his portfolio, but usually the risk-taking investors prefer equity and risk-averse investors like debt. While choosing from the options, investors should go for less risky options as some of the debt instruments also have risk attached to it.
What are bonds?
Bonds are debt instruments, or a loan that you make to the government or a company at fixed interest rates for a certain period of time. In return, you get an interest payment on the investment at regular intervals and the principal amount is paid back on maturity.
When stocks or equity returns value when the market is bullish, bonds balance out a portfolio as they tend to do better when the economy is not performing well.
What are the different types of bonds?
In New Zealand, there are different options while investing in bonds. Investors need to study the risk and return profiles carefully before making a decision.
- New Zealand Government Kiwi Bonds:These are government bonds with different maturity periods. They can be issued for six months, one year, two years and four years.
These can be bought directly from over the counter (OTC) through investment brokers, banks and the NZDX. An investor can also open a direct online account.
Corporate bonds: These bonds are usually part of public offer when a company issues prospectus and the investors are able to make a direct investment. It is not the same as owning shares or stocks of the company where one becomes part owner and your returns are impacted by the cashflows of the company. In this one gives a loan to the company and you get an interest payment that is agreed upon.
Pros and cons of government bonds vs savings accounts
There are some differences between savings and government bonds. While savings accounts and bonds are both borrowings, savings are for a particular bank that one operates in, and bonds are for the government or the company. Both are secure sources of income, but bonds have a maturity period, while savings does not have. The money is your liquid asset and can be taken out anytime.
However, most bonds don’t trade on the exchange. They trade over the counter which implies that investors engage in over the counter deals through informal networks of bond dealers and not through any formal institution.. Unlike exchanges, the sale and purchase of bonds are not centralised, and not all participants can see them.
Types of instruments available on NZDX
The instruments available on the NZXDX are wholesale bonds, retail vanilla corporate bonds, retail structured debt, retail debt equity hybrids, sustainability bonds and green bonds.
What are Kiwi Bonds?
Kiwi Bonds are a simple investment often compared to term deposit. They offer fixed rate of interest on maturity. They are mostly denominated in NZD with a fixed rate paid on a quarterly basis. They can be redeemed on maturity or earlier at the discretion of the bondholder. They are issued by the government of New Zealand. They come with a lot of security as they are fully backed and secured by the government. They are a safe investment option for New Zealanders. Additionally, the investors prefer them because of the relatively stable economy of New Zealand and because the government holds a credit rating of AA++, which is the second-highest debt rating in the world. These can be bought through NZX brokers.