Time to reinvest…

Throughout the life of a fixed income asset, the interest payment terms and schedule of payments are usually known. These are stated at the inception when the asset/investment is first being issued. The maturity date and conditions of maturity, if any, are also usually stated upfront. Investors holding fixed income assets usually are aware of the maturity dates of these investments when they first make the purchase. Plain vanilla bonds for example, will pay interest on a predetermined schedule (usually semi-annually) up to the stated maturity date at which time the final interest payment is made and the principal repaid to the investor. There are other variations of fixed income products or bonds which have conditionalities attached and they operate slightly differently than a plain vanilla bond.

Unlike plain vanilla bonds, other bonds may not have a fixed maturity date or may have no maturity date at all. The maturity may be at the discretion of the issuer, giving them the right to repay principal when market conditions are favourable for them, but no obligation to do so on a specified date. Bonds with a maturity date are classified as “Callable” if the issuer has the right to repay principal prior to a stated maturity date. Others with no set maturity date are classified as “Perpetual” bonds. Perpetual bonds can also have a call feature, allowing the issuer to determine if and when the principal is repaid to the investor.

Aside from interest payments and maturities, investors can also sell their bonds at any given time but the proceeds from the sale will be determined by the current market price of the bonds. In all three scenarios, there is money coming in for the investor and a decision needs to be made as to how to use this money. If there are no immediate cash needs or payment obligations, an investor can now look at reinvestment options. When it comes time to reinvest, there are a wide array of options available to the investor. It is important to analyze the options to make the best decision.

In the case of interest payments received from your investment, you could look to see if the amount received can be added to your current investment. If it can, you would have already invested in the current instrument, known and accepted the level of risk associated, been comfortable with the rate of return and confident in the issuer. Making this decision may be the easiest course of action. However, if you are not able to add the amount received to the current investment then you will need to look for other investments. For smaller amounts that cannot be added to your current principal, there are short-term investment vehicles which can allow you to accumulate smaller amounts over time and allow for larger purchases in the future. For accumulating, look at short-term investments such as repurchase agreements or promissory notes which have lower initial investment amount and allow you to add at any time, rather than a savings account which will generate very little interest. Always maximize your earnings on even the smallest amounts.

For larger sums received from investments which are sold, called or matured, there are a plethora of reinvestment options available. Often the issuer may have other investment instruments being offered in the market. If the credit quality of the issuer has not changed negatively, the terms and returns being offered are attractive given market conditions, then reinvesting in one of these instruments on offer may be a good idea. This will allow you to remain within your comfort zone. When a bond is called or matured, they may also create new investment instruments in which persons who were previously repaid can reinvest. Assess the new investment option and determine if this is the best option for you.

Overall, it is important to look at the market to see what is available. Compare offerings by various issuers and make sure that your reinvestment decision meets your risk and return appetite. Assess the ones that do meet your appetite by comparing them to decide which one or more best compensates you for the level of risk. Also ensure that the choices meet your overall financial needs and goals. Speak with a licensed financial advisor to explore all possible reinvestment options, narrow the list, and make the best reinvestment decision.

Dwayne Neil, MBA, is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: if you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm.

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