http://www.eurekareport.com.au/print/17771
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http://www.eurekareport.com.au/print/17771
and Envestra 2025. Combined they account for roughly 14% of the portfolio. Depending on your ination view and your dependency on your investments to live, Id recommend you hold anywhere between 10% and 30% of ination-linked bonds (ILBs) in your portfolio. The lower xed rates fall, the greater your allocation to ination-linked bonds should be. As Ive mentioned in other articles, you should also be starting to add oating-rate notes (FRNs). In other words, plan for an inationary/rising interest rate environment. ILBs are an investment that will give you certainty in regard to beating ination. That is because income is linked to the Consumer Price Index (CPI), and if the CPI increases so do your income payments and, in the case of capital-indexed bonds, the amount the issuer must repay you at maturity. These are excellent investments for investors approaching retirement and wanting to make sure their investments keep pace with ination (see previous articles A bond thats licensed to kill, ination [3] and Getting the ination drift [4] for more information). Table 1 below shows a range of capital-indexed ination-linked bonds.
[5] There is a good range of risk and returns in this table. All the bonds are senior debt, so sit high in the capital structure. The face value amount shown is the value of the investment you are buying and if maturity was the same day, the amount the company must repay you. If the capital value is less, then the bonds are trading at a discount, providing a capital gain if you hold to maturity. The coupon is the interest payment over and above ination, set out at rst issue. However if you look at the running yield this is the interest margin based on the current price of the bond and does not include any ination assumption. Running yield will increase as the capital value grows. The yield to maturity returns are based on an ination assumption of 2.5% (the RBA target mid-point). For investors with large amounts to invest, the Commonwealth Bank 2020 ILB with an estimated yield to maturity of 4.85% looks attractive, especially given very low and xed term deposit rates and the exibility of the bond given interest payments will grow with ination, coupled with very high liquidity.
http://www.eurekareport.com.au/print/17771
not be the best option for you. Waiting until maturity for the return of the majority of your funds may not suit. Another type of ination-linked bond called the indexed annuity bond (IAB) might be more appropriate. Investors outlay a lump sum when they buy the bonds, then the issuer returns the capital plus interest (which is the part linked to ination via the CPI) over the life of the bond. Table 2 shows a range of IAB issues. The (renance) risk with these bonds declines over the life of the bond as you are being repaid principal. The most attractive IAB here is from Australian National University; essentially you are buying a bond, the majority of whose revenue comes from the Federal government, and are being paid an estimated 5.48% return. If youre a retail investor the Praeco IAB is attractive in that Praeco has no other debt repayment due before 2020, so it is highly likely this bond will be repaid on time and in full.
[6]
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http://www.eurekareport.com.au/print/17771
in the secondary market and the margins can be very attractive. Just a few weeks ago a parcel of ME Bank RMBS came onto the market with a yield to maturity of over 7%. The securities didnt last long but if you think these types of investments might interest you, talk to your broker and get them to register you as an interested buyer when the next securities become available.
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