What should I consider before selling my bonds?
Just like when you’re buying bonds, there are plenty of things to weigh up before deciding to sell them.
If your bonds are listed on a stock exchange and you decide to sell bonds before their maturity date, the price you get for them may be above or below their face value, which means you could make a capital gain or loss. There is also no guarantee that you’ll be able to find a buyer.
With this in mind it’s important to assess the current market price of a bond before making a decision to sell.
Bond prices
Below are two different Australian Government Bonds that are listed on the Australian stock exchange and therefore available to be bought and sold.
The first bond has a maturity date of 2025 and pays a coupon rate of 3.25%. The price of the bond is $90.93, which represents the price that buyers last paid for the bond. It is a discount of $9.07, from the principal of $100, which means you would make a loss if you sold at this price, having bought the bonds at face value.
The government bond shown above is for illustrative purposes only and does not represent a recommendation by MyWealth to buy, sell or hold any security.
The government bond shown above is for illustrative purposes only and does not represent a recommendation by MyWealth to buy, sell or hold any security.
The fact that the second bond has a coupon rate that is 1.25% higher than the first bond makes it more attractive to investors, which is why they’re willing to pay more for it.
When the Reserve Bank of Australia changes, or is expected to change, the official cash rate, which is the key benchmark for interest rates, it can have an impact on bond prices.
When interest rates rise, the market value of bonds generally falls and vice versa.
Other things to consider
Investment goals - When you bought the bonds, you might have had a particular goal in mind. Don’t forget that by selling bonds, you will forego the regular interest payments.
However, if your objectives have changed or you have the opportunity to lock in a capital gain that meets your targets, then it could be the right time to sell.
Rebalancing – selling your bonds may alter the balance of your overall investment portfolio, so consider whether you want to make a diversion from your original strategy.
Tax – remember to consider the tax implications of selling your bonds. Will the sale result in an assessable capital gain that would impact your overall tax bill?
Transaction costs – you have to pay a brokerage fee each time you buy or sell bonds.