The main risks
Every bond carries risk even when the coupon looks safe. Understanding each one helps you size your position sensibly rather than chasing the highest headline rate.
- Credit risk: the issuer cannot pay coupons or repay principal at maturity.
- Interest rate risk: market rates rise, so the resale price of your bond falls.
- Liquidity risk: thin trading means you may not sell quickly at a fair price.
- Reinvestment risk: at maturity, prevailing rates may be lower than your old coupon.
- Concentration risk: too much of your portfolio with one issuer or one sector.
Reading credit ratings
Ratings from agencies such as S&P, Moody's and Fitch summarise default probability. AAA to BBB- is investment grade; BB+ and below is speculative, sometimes called high yield.
Unrated issues are common in New Zealand and are not automatically bad, but they demand more work: read the PDS, check the issuer's earnings, gearing and interest cover, and understand where your bond ranks.
How RWT works
Coupon income is interest income. Resident withholding tax is deducted before payment at the rate you elect with the registry — 10.5%, 17.5%, 30%, 33% or 39% for individuals, based on your total taxable income.
If you do not supply an IRD number, a no-declaration rate of 45% applies. Electing a rate that is too low leaves a tax bill at year end, so match it to your actual marginal rate.
PIE funds and other structures
Bond PIE funds are taxed at your prescribed investor rate, capped at 28%, which can be more efficient for investors on the 33% or 39% marginal rate. Direct bonds held personally do not get that cap.
Trusts, companies and portfolios held through wrap platforms have their own rates and reporting, so confirm treatment with your accountant before committing large sums.
Practical risk management
Sensible habits that protect fixed-income portfolios.
- Diversify across at least four or five issuers and sectors.
- Ladder maturities so capital returns at regular intervals.
- Keep speculative or unrated issues to a small share of the portfolio.
- Read the PDS ranking section before applying, not after.
- Get independent financial advice for large allocations.
Frequently asked questions
What happens if an issuer defaults?
A trustee acts for bondholders and pursues recovery. Senior secured holders rank first, then senior unsecured, then subordinated holders and shareholders last. Recovery is never guaranteed.
Do I still file a tax return if RWT is deducted?
Usually the deduction settles your liability, but if you elected too low a rate or have other income you may owe more at year end.
Is a higher coupon always a warning sign?
Not always, but a materially higher rate usually reflects lower credit quality, a longer term, or subordinated ranking. Check which before you invest.
Are bond gains taxed?
Bonds bought and sold on market can create taxable gains or losses under the financial arrangements rules. Confirm your position with a tax adviser.