Bonds and Fixed Income

📉 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

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.