How do I get my money back from bonds?
Depending on the type of fixed interest investment that you own, there are various ways in which you can be repaid.
There are two main ways that you can get your money back from a fixed interest investment, such as corporate or government bonds:
- repayment of the principal when the bonds mature
- selling the bonds on the secondary market
When a company or government first issues bonds, they will usually sell them at a price of $100, known as the principal or face value.
The issuer must then repay that amount on the maturity date of the bond. This repayment is known as the ‘redemption’ of the bond.
Bond maturities
Maturity dates can range hugely, from less than a year to 50 or more years into the future.
In November 2013, the Australian Government issued a 20 year bond, its longest dated yet, while some corporate bonds listed on the ASX are not due to mature until beyond 2070.
If you hold onto the bond until the maturity date you will receive the principal as well as any outstanding interest payments. The principal will be the same as when the bond was issued.
However, if your bonds are listed on a stock exchange you have the option to sell them before their maturity date.
If you decide to sell your bonds you must accept that the price you receive could be above or below their face value, depending on the level of demand for them from investors.
What are the exceptions?
Some bonds will be issued with an option for the company or government to redeem them ahead of the maturity date. Others, known as ‘perpetual bonds’ have no maturity date and the company that issues them has control over when to redeem or convert the bonds.
The exact terms and conditions of different bonds will vary, which is why it’s important to read and fully understand the prospectus before investing.
Preference shares, also known as ‘convertibles’ or ‘hybrids’, are issued in a similar way to bonds and with similar features. However, the company that issues them can convert the bonds into ordinary shares in the company, instead of repaying the principal.