Investing in government retail bonds: Why you should reinvest your interest
Investing in government retail bonds is a good savings vehicle to consider if you want to lock your money away for the longer-term.
By lending money to the South African government by buying these bonds, you receive two interest payments a year until your bonds mature.
But should you take your interest or should you reinvest it?
Let's take a closer look…
Government retail bonds
The interest you receive from investing in government retail bonds
pay out interest twice a year until the bond matures. When buying bonds, you need to make a decision about how you’ll receive this interest.
Your options are:
Reinvest your interest until your bonds mature;
Receive interest payments on a monthly basis; or
Receive interest payments twice a year.
So how can you work out which is the best option for you?
What to do with your interest from government retail bonds
Let’s take a look at an example to see…
If you decide you want to buy fixed rate government retail bonds, the current rate of interest are:
Two years: 8%;
Three years: 8.25%; and
Five years: 8.5%.
Say you decide to invest R10,000 (buy ten government retail bonds). Here’s the difference of investing in the different interest payment options:
As you can see the difference between receiving interest on a monthly or twice a year basis if negligible.
But have a look at what happens when you reinvest your interest. It really makes a difference to your returns, especially for the longer-term bonds.
By reinvesting your interest, your interest gains interest, growing your investment faster. This is compounding.
If you plan to invest in government retail bonds, opt to reinvest your interest, especially if you’re buying three or five year bonds. It makes a big difference to your returns.
So there you have it. Why you should reinvest your interest when you buy government retail bonds.
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