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The Commonwealth Bank's retail bond - a good buy?

Why would someone invest in something like the Commonwealth Bank’s retail bond when they could just take out a fixed term deposit at interest rates around 6.5 per cent?

This retail bond was a capital guaranteed product that paid income to the saver/investor each quarter. The minimum investment was $5000 and would mature on 24 December 2015. Now that could be one reason why someone would not want this bond – the maturity date of 2015.

However, one reason they might like the bond is that it’s tradeable on the ASX at the prevailing market price. If you had a fixed deposit, you might have big break costs if you wanted to get out of the deposit earlier than you expected.

Also the basis for paying interest on the bond might have appealed to some people. For the first quarter, the interest rate was six per cent, but after that there would be a floating rate, which is based on the 90-day bank bill rate plus a margin of 1.05 per cent, which is fixed over the duration of the loan. So, if the bank bill rate was five per cent, then the floating rate would be five per cent plus 1.05 per cent which would be 6.05 per cent. And this could explain why some people would have opted for the bond over a term deposit with a fixed rate of six per cent.

If someone expects interest rates to rise, well so would the bank bill rate and that means the floating rate would too. If another financial meltdown happens, then the bank bill rate will head down which will take the floating rate with it. So that’s it in a nutshell.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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Published on: Wednesday, January 19, 2011

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