Understanding SA Government Bond Coupons (Interest Payment) & Tax Implications

EasyEquities has recently launched South African government bonds, now accessible with no minimum investment in both ZAR and TFSA wallets. The maturities of the bonds on the platform are 3, 7, 12, 17, and 25 years. These bond investments do not have a lock-up period, which means investors can buy and sell anytime during local bond market trading hours. 

Understanding key concepts like bond yield to maturity and fixed coupons becomes crucial as investors explore this opportunity.

The bond yield to maturity (YTM) is the total return anticipated on a bond if held until maturity. It accounts for the fixed interest payments, known as coupons, and any capital gain or loss at maturity. Comprehending YTM provides insight into potential returns for those exploring these bonds.

The movement in interest rates plays a role in bond yield to maturity. Higher rates tend to bring down bond prices, as there is an inverse relationship between bond yields and prices. When interest rates fall, existing bonds with higher fixed rates become more attractive to bond investors. As investors seek higher yields, this has the effect of  increasing  bond prices and lowering YTM

Refer to the link below if you wish to convert the price to yield to maturity. The price must be in cents on the calculator (if R1.05, then it will be 105 cents). 

During the investment period, investors are entitled to coupon payments - a fixed interest paid biannually (twice a year). These coupon payments are fixed throughout the bond period. For example, if a bond has a coupon of 10%, investors can expect 5% every six months.

Bond investors can reinvest their coupons any time after the coupon is paid into bonds or other preferred assets or cashed out into one's bank account. To qualify for the coupon, investors need to invest in the specific bond before the last day to trade (LDT). The exact last date to trade for each South African bond on the EasyEquities platform is indicated in the description of each.

It's important to understand that coupons are subject to income tax (except in a tax-free savings account (TFSA). Annual interest exemptions are R23,800 for individuals under 65 and R34,500 for those aged 65 and above. To determine the tax obligation check the latest income tax brackets on the SARS website.

When investing in bonds, paying close attention to the country's Macroeconomics, such as the inflation rate via the Consumer Price Index, and other economic data, such as interest rate direction, exchange rates and Gross domestic product (GDP), may also be helpful in making an informed decision. To learn more about bonds, check out the FAQ here or below.