What is a Kiwi Bond?
A kiwi bond is a type of investment that is issued by the New Zealand government and is only offered to New Zealand residents. It is a type of debt security issued by the New Zealand Debt Management Office on behalf of the government.
An investor can purchase kiwi bonds directly from the Reserve Bank of New Zealand. Or, they can purchase it through an intermediary, such as a bank, broker, accountant, solicitor, or investment advisor.
The Kiwi bond’s unique name is tied to New Zealand’s culture and heritage. It is named after a native bird found in New Zealand.
Characteristics of a Kiwi Bond
- It is similar to a term deposit because both provide a fixed interest rate for a given period of time.
- It is only issued in New Zealand dollars.
- The minimum amount that an individual can invest in one bond is $1,000, and the maximum amount is $500,000.
- It comes with specific maturity dates for six months, one year, two years, or four years.
- It is redeemable on the maturity date or whenever an investor wants to cash out their investment.
- An application must be filled out and processed before an investor is allowed to purchase a kiwi bond. They can get an application form from the New Zealand Debt Management Office.
- It is the main choice of investments for residents in New Zealand. Even if an individual holds citizenship from New Zealand, they are not eligible to invest in a kiwi bond unless you are a resident living in New Zealand.
Interest Rates for a Kiwi Bond
Interest is paid quarterly to bondholders. The interest rates are set by the New Zealand Debt Management Office. As of July 2020, below are the most recent interest rates:
- 6 months: 0.25% per annum
- 1 year: 0.25% per annum
- 2 years: 0.50% per annum
- 4 years: 0.50% per annum
If the interest rate changes between the time an investor applies for the bond and the time that their application gets processed, there is the possibility that the new interest rate is lower than the interest rate on the day that they submitted their application. In such a case, they will get a choice of accepting the new interest rate or to cancel the application.
Advantages of Investing in a Kiwi Bond
Fixed interest rates are lower than interest rates on investments issued by a bank. Kiwi bonds offer fixed interest rates, so it comes with a lower risk compared to investments issued by the bank. Therefore, bonds are a safe investment option for New Zealand residents.
Additionally, it is a preferred choice of investment for residents because of the relatively stable economy in New Zealand and because the government holds a creditworthiness rating of AA, which is the second-highest debt rating in the country.
Since New Zealand is expected to report positive economic growth in the future, bondholders can also expect to yield positive earnings in the long-term.
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