Buying a 5-year Bond and redeeming early is usually a better option!

Better rates are often available via early redemption of bonds paying interest monthly

(September 2017)

Once a bond has been held for 12 months, it can be redeemed at a cost of one interest payment.  As over 60’s can elect to receive interest monthly, this means the cost can be just 1 month’s interest.

So there are times when buying the 5-year bond and redeeming after 2 or 3 years, gives a better return than just buying the 2 or 3 year bonds. The situation as at September 2017 is as follows:

Fixed Rate RSA Retail Savings Bond Rates (NACM)

Term (Years)RSB Rate %Effective TermEffective Rate %Improvement %
27.505 year bond redeemed after 2 years7.91+0.41
37.755 year bond redeemed after 3 years8.02+0.27
58.25

Strategy Interest Cash Flow Comparison Table

Date2-year Bond5-year Bond
Redeemed after 2 years
7.50%8.25% + 1 month penalty
2017/08/31--
2017/09/30625.00687.50
2017/10/31625.00687.50
2017/11/30625.00687.50
2017/12/31625.00687.50
2018/01/31625.00687.50
2018/02/28625.00687.50
2018/03/31625.00687.50
2018/04/30625.00687.50
2018/05/31625.00687.50
2018/06/30625.00687.50
2018/07/31625.00687.50
2018/08/31625.00687.50
2018/09/30625.00687.50
2018/10/31625.00687.50
2018/11/30625.00687.50
2018/12/31625.00687.50
2019/01/31625.00687.50
2019/02/28625.00687.50
2019/03/31625.00687.50
2019/04/30625.00687.50
2019/05/31625.00687.50
2019/06/30625.00687.50
2019/07/31625.00687.50
2019/08/31625.00-
Total15,000 15,813

Using the levels above, the alongside table compares the cash flows for a R100,000 5 year bond redeemed after 2 years, versus the same investment in a 2 year bond.

  • The total cash flow received from the 2-year bond will be R15,000 at a monthly rate of 7.50%

  • The total 5-year bond’s cash flows over the same two years, including a penalty of one month’s interest, amounts to R15,812.50, or R7,906.25 per year, i.e. a monthly rate of 7.91%

An up to date comparison for both 2 and 3 year periods can be found at BondClub Market Data

For those interested in doing the calculations themselves, the following formula can be used:

2 Year effective Rate = 23/24  x 5-year Bond Rate = 7.91%.

  • So in the example above 23/24 x 8.25 = 7.91

3 Year effective Rate = 35/36  x 5-year Bond Rate = 8.02%.

  • So in the example above 35/36 x 8.25 = 8.02

A further benefit of using this strategy is that should rates be lower at the end of the 2 years, and you do not need to withdraw the money, you have the option to stay invested at the original 5 year rate. Conversely, if rates happen to be higher, then the restart option will provide access to those higher rates.

NB: This strategy only works effectively for Bonds that pay interest monthly, and this is an option only available to those over 60

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