Bonds and Fixed Income
📃 What a Bond Is
A bond is essentially a loan you make to a government or company. In return, they pay you regular interest and promise to repay the amount at the end of the term. Bonds and similar fixed income sit between cash and shares: steadier than shares, with more return than cash, and they play a useful role in balancing a portfolio.
How a Bond Works
Government vs Company Bonds
Government bonds are generally the safest, since governments are reliable borrowers. Company bonds pay a higher interest rate to compensate for the greater risk that the company could struggle to repay. More risk, more return is the usual trade-off.
📉 Prices, Rates and Risk
Prices Move Opposite to Rates
This catches people out. If you hold a bond paying a fixed rate and market interest rates rise, new bonds pay more, so your older, lower-paying bond becomes less attractive and its price falls. If rates fall, your higher-paying bond becomes more valuable. Prices and rates move in opposite directions.
Key Risks
| Risk | What It Means |
|---|---|
| Interest rate risk | Prices fall when rates rise |
| Credit risk | The issuer may fail to pay |
| Inflation risk | Fixed interest may not keep pace with prices |
Hold to Maturity vs Sell Early
If you hold a bond to maturity and the issuer pays, you receive the agreed interest and your principal back. If you sell before maturity, you get the market price, which may be more or less than you paid depending on where rates have moved.
🧩 The Role in a Portfolio
Income and Stability
Bonds provide regular income and tend to be steadier than shares, so they cushion a portfolio. When shares fall, a bond allocation can soften the overall drop, which is why more conservative investors and retirees often hold more bonds.
Balancing Shares and Bonds
A common idea is to hold more shares when you are young and have time, and more bonds as you approach needing the money, for steadier income and less volatility. This mirrors how KiwiSaver funds shift from growth to conservative.
Accessing Bonds
Most people get bond exposure through a fund or a balanced KiwiSaver fund, rather than buying individual bonds, which gives diversification and removes the work of choosing issuers. See our Index Funds and ETFs guide.
💡 Common Mistakes
Mistake 1: Thinking Bonds Cannot Lose Value
Bond prices fall when rates rise. They are steadier than shares but not risk-free.
Mistake 2: Chasing High-Yield Without Understanding Credit Risk
A bond paying a very high rate usually carries higher risk of the issuer not paying. The extra yield is compensation for that risk.
Mistake 3: Ignoring Inflation
Fixed interest can be eroded by inflation, so the real return may be lower than the headline rate suggests.
Mistake 4: Holding Only Bonds When Young
With decades to invest, an all-bond portfolio may miss the growth that shares provide. Match the mix to your timeframe.
A Simple Approach
See our Risk and Return and Diversification guides. Final word: bonds are loans that pay regular interest and return your principal at maturity, sitting between cash and shares for risk and return. Their prices move opposite to interest rates, and they add income and stability to a portfolio. Most people hold them through a fund. This is general information, not financial advice.
🎯 Test Your Knowledge
Quiz on Bonds and Fixed Income (20 Questions)
Frequently Asked Questions
What is a bond?
A bond is a loan you make to a government or company that pays regular interest and returns the principal at maturity.
How do bonds differ from shares?
Bonds pay fixed interest and rank ahead of shares if a company fails, so they are generally lower risk and lower return than shares.
Why do bond prices fall when interest rates rise?
Existing bonds paying older, lower rates become less attractive than new higher-rate bonds, so their market price falls.
Are bonds safe?
Government bonds are low-risk; corporate bonds carry more risk depending on the issuer. All bonds still carry interest-rate and inflation risk.
Related guides
- Breaking a Fixed Mortgage Guide, a related guide in the same area.
- Budgeting on an Irregular Income, a related guide in the same area.
- Dividend Income - How Shares Pay You (NZ), a related guide in the same area.
Related tools and guides
- Yield to maturity calculator: the annualised return a bond price implies.
- Bond ladder builder: staggered maturities balancing access and return.
- Term deposit calculator: the after-tax return on the nearest fixed-interest cousin.