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JARGON BUSTER

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The Fixed Interest and bond market is full of jargon. Below we have explained some terms used in the article above.

Yield to Maturity – The yield to maturity is a key factor when looking at bonds. The yield to maturity takes into account the Coupon, and the relative premium/discount the bond is trading at on the market. Currently many bonds trade at a discount, which means that the yield to maturity includes the capital gain an investor makes by buying a bond below par and holding it to maturity.

Coupon – The coupon is the annual interest rate paid on the bond. Many bonds on the NZ market have relatively low coupons when compared to today’s interest rates, which is why many are now trading at a discount to their par value.

Official Cash Rate – The OCR is the interest rate set by the Reserve Bank of New Zealand. It impacts the rates banks set for both deposits and loans, as well as the rate at which bonds trade at on the NZ Debt Market. Most registered banks hold settlement accounts with the Reserve Bank, which are used for inter-bank transactions. The interest rates the Reserve Bank apply to the settlement accounts are tied to the OCR, and therefore flow through to day-to-day banking.

Credit Rating – Another important consideration for those using the NZ Debt market is the respective credit rating of the issuer (i.e. the entity you are effectively lending money to). Different rating agencies signify their credit ratings in slightly different ways, but generally an A rating is very safe, whereas ratings C and below carry more risk.

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