“I’ve reached my 40s, so should I increase my bonds?” When you think that and open the product screen, you see individual government bonds, domestic bond funds, U.S. Treasury bonds, and foreign bond funds lined up.
Although they are all called “bonds,” the mechanisms for getting your money back are not the same. Before deciding on your age or allocation, you need to distinguish what you are trying to buy.
Products with a maturity date versus products with continuous price fluctuations
According to the Ministry of Finance’s guide, individual government bonds come in variable 10-year, fixed 5-year, and fixed 3-year types, and the government is responsible for paying the principal and interest. You can redeem them early one year after issuance, but an early redemption adjustment amount, calculated by multiplying the last two interest payments (before tax) by 0.79685, will be deducted. This mechanism is different from selling regular government bonds on the market before maturity.
On the other hand, bond funds are investment trusts that incorporate multiple bonds. Many of these products do not have a maturity date like individual bonds, and their net asset value fluctuates based on interest rates and the prices of the bonds held. Since purchase fees, trust fees, and redemption costs vary by product, you must check the prospectus.
For foreign currency-denominated bonds, in addition to the price of the bond itself and the creditworthiness of the issuer, the exchange rate when converting back to yen changes the outcome. The Japan Securities Dealers Association explains that for products received in foreign currency, in addition to price fluctuations, credit risk, and liquidity, the yen-converted amount changes due to exchange rates, and it is possible for the value to fall below the principal.
Distinguishing the three products with four questions
Here is an example of how to fill it out.
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Individual government bonds: Maturity exists / Early redemption possible after 1 year / Yen-denominated / Early redemption adjustment applies
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Domestic bond funds: Usually no maturity / Redeemed at market price / Primarily yen-denominated / Check trust fees
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Foreign currency-denominated individual bonds: Maturity exists / Sold at market price if sold early / Exchange rate fluctuations apply / Check exchange costs at time of trade
The four questions are: “When will it be returned?”, “How much will I get if I sell it early?”, “In what currency will it be returned?”, and “What do I pay while holding it?” Just knowing that the “yield is high” does not tell you how much you will have on the day you need to use the yen.
Even with the same “3% per year,” the movement of your take-home amount differs between holding a yen-denominated bond until maturity and converting from foreign currency back to yen. Distributions from bond funds are also not the same as bank deposit interest. You can only compare them once you write down the currency, maturity, and costs next to the numbers.
For example, if it is for repair costs five years from now, first write down the time you will use it, the possibility of early redemption, and the amount needed in yen. It is more practical to exclude products that do not meet those conditions than to search for the “correct” answer based on age. This article is an explanation of general mechanisms and does not recommend specific products or allocations.
Today’s small practice
Open one “bond” product you hold and fill in the four columns: maturity, early redemption, currency, and costs. If even one is unclear, check the prospectus or the document delivered before the conclusion of the contract.
Reference Information / Bibliography
A haiku for the day
Autumn wallet, set aside for the day I’ll use it