Special attention paid to RSA Retail Savings Bonds and U.S. Savings Bonds
What are non-marketable securities?
Non-marketable securities refer to assets that are not traded on any major secondary financial markets, making it difficult to buy and sell such securities or assets.
They are usually bought and sold as part of private transactions or via over-the-counter (OTC) trading. OTC trading refers to the trade of securities between two parties, often facilitated via a dealer network. OTC trading takes place in an over-the-counter (OTC) market which is a decentralised market.
Characteristics of non-marketable securities
- Highly illiquid
Non-marketable securities are non-liquid, implying that they cannot easily, quickly, and cost-effectively be converted into cash.
Typically, due to a lack of liquidity, in several instances, the security has to be held until its maturity date.
- Only tradable in an OTC market or via private transactions
Non-marketable securities cannot be bought and sold on secondary financial markets. Hence, they have to be traded in an over-the-counter (OTC) market or during private dealings.
- Transferability
Some of the non-marketable securities are not transferable and cannot be resold. Hence, the registered owner is required to keep the security until its maturity.
Express differently, these securities are also referred to as non-negotiable securities whose ownership is not transferable from one owner to another owner.
Liquidity and transferability of securities are interrelated.
- High return
The returns of non-marketable securities exceed the returns of marketable securities. Because they are backed by a government, and they have long maturity periods. Their duration can typically range from three to ten years.
In addition, their lack of marketability and their illiquidity cause investors to demand a higher rate of return when investing in them.
Examples of non-marketable securities
Non-marketable securities also referred to as non-tradable securities, consist, inter alia, of debt instruments issued by governments, government bonds, local government securities, and shares in private companies.
Debt instruments issued by governments
The majority of non-marketable securities are debt instruments issued by governments, such as savings bonds, which will be explained in more detail below.
Savings bonds
A savings bond is a bond offered by a government to its citizens, providing a guaranteed return and requiring a low entry limit. It enables a person to invest a low principal amount and earn a fixed income over a certain time period.
Governments issue savings bonds to obtain funds for capital projects and operational expenditures.
RSA Retail Savings Bonds and U.S. Saving Bonds are examples of savings bonds issued by governments.
RSA Retail Savings Bonds
The government of South Africa describes its RSA Retail Savings Bond as ‘an investment with the Government of South Africa which earns fixed, or inflation-linked interest for the term of the investment.’
The following information is obtained from the government’s website regarding RSA Retail Savings bonds, as well as the website answering frequently asked questions, concerning this type of savings bond.
Two types of savings bonds, namely:
- Fixed-Rate Retail Savings Bond series consisting of bonds with two-year, three-year, and five-year terms. A market-related fixed interest rate is paid on interest payment dates until maturity.
Although, different interest rates apply to each of the maturities in the series.
- Inflation-Linked Retail savings Bond series include bonds with either a three-year, five-year, or ten-year maturity. Capital amounts invested in these savings bonds are adjusted according to inflation during their term.
A floating interest rate is payable on the dates when the interest is due.
However, an investor may withdraw his or her money after twelve months of investing, subject to a penalty fee.
Investors can either choose to receive their interest payments semi-annually (30 November and 31 May) or reinvest the interest at the same interest rate.
In addition, investors sixty years and older, who invest in the Fixed Rate Savings Bond, have the option to receive their interest payments monthly. This option is called the Pensioners Bond.
Some features of RSA Retail Savings Bonds:
- Only natural persons who are South African citizens and who have a South African Bank account are allowed to buy them.
- The minimum investment amount is R1 000 while the investment is limited to a maximum amount of R5 million.
- An investor can invest as frequently as he or she wants.
- They are lump-sum-type of investments, meaning each investment by an investor is considered a separate investment with its own date of maturity and interest rate.
In other words, a new investment cannot be added to an existing investment.
- RSA Retail Savings Bonds are non-tradable securities, meaning they cannot be transferred or sold to a third party. Therefore, beneficiaries of a deceased person cannot inherit a savings bond.
Instead, when the owner of an RSA Retail Savings Bond dies, the investment (capital amount and outstanding interest) will be paid to the nominated beneficiary(s) or to the deceased estate.
In addition, they cannot be offered as security to obtain a loan from a financial institution.
- There are zero administration fees payable on them.
U.S Savings Bonds
There are currently two types of U.S. savings bonds that can be bought electronically or in paper form, namely the Series EE and Series I bonds.
- Series EE U.S. Savings Bond
Series EE bonds can be bought at face value and are worth their full value when they are cashed or redeemed. These bonds have a fixed interest rate, which is paid at maturity or redemption.
- Series I U.S. Savings bond
Series I bonds have a variable interest rate which are adjusted for inflation. Similar to the Series EE bonds, Series I bonds are redeemed at face value.
Some characteristics of U.S. Savings Bonds:
- Individuals are allowed to own U.S. Savings Bonds when they meet the following requirements:
Must be in possession of a Social Security Number.
Must meet one of the following conditions:
- Must be a United States citizen, whether living in the United States or abroad.
- Must be a United States resident.
- Must be an employee of the U.S.A. government, regardless of where he or she lives or his or her citizenship status.
- Contrarily to RSA Retail Savings Bonds, electronic U.S. Savings Bonds can also be bought by trusts, estates, corporations, partnerships, and some other entities.
Regarding paper savings bonds, only trusts and estates can be owners of U.S. Savings Bonds, and only in some cases. Corporations, partnerships, and other entities are prohibited to buy these bonds in paper form.
- Series I bonds bought electronically require a minimum payment of $25. The maximum investment amount allowed is $10 000. Above the minimum amount of $25, bonds can be bought in penny increments. For example, an investor could buy a $25.36 bond.
Investors are restricted to $10 000 in electronic Series I bonds in a calendar year.
Paper Series I bonds can be bought in denominations of $50, $100, $200, $500, $1 000, up to $5 000 in a calendar year.
The bonds are bought at face value.
- The U.S Savings Bond is a registered security that represents a contract between the investor and the government of the U.S.A., making the security non-transferable and non-marketable and ensuring that the bond does not fluctuate in price.
Hence, the savings bond cannot be sold by the owner to another investor.
- They pay no interest until redemption or the maturity date. The interest compounds twice a year and accrues every year for thirty years. If a savings bond is held for more than thirty years, it will no longer earn interest from year 31.
- A U.S. savings bond cannot be redeemed (cashed in) before 12 months have expired since the initial purchase of the bond. Additionally, if the bond is redeemed before it is five years old, the investor will lose the interest in the last three months.
Shares (equity) of private companies
A private company is owned by a small number of shareholders, or even by a single shareholder. Shares of private companies are not bought and sold on public stock exchanges.
Generally, shares of private companies are less liquid. The evaluation of a private company’s shares can be a complicated process.
Some advantages of non-marketable securities
Regarding non-marketable securities issued by governments:
- Savings bonds issued by governments are considered one of the safest ways to invest. The return is guaranteed, and the investor seldom faces the risk to lose his or her money. They entail almost no default risk or price risk.
- The securities are usually acquired at a discount but are redeemed at face value. This enables an investor to gain a higher yield and minimise investment risk.
- Non-marketable securities ensure stable ownership.
- They can be purchased as gifts for a family member or a friend. A parent can purchase a savings bond for his/her child.
In South Africa, children, as minors and non-income earners, do not pay tax on retail savings bonds.
Concerning shares of private companies:
- Investing in a private company can be a way to help a friend or family member to start a business.
- Individuals who are allowed a share of the ownership of a private company, are contributing their funds and expertise, enabling the company to grow and prosper.
Some disadvantages of non-marketable securities
- Lack of liquidity is one of the main handicaps of a non-marketable security. If an investor requires cash quickly, the security cannot be liquidated quickly.
- Investing in non-marketable securities, an investor should ensure that only the disposable income that is not required before the maturity date, is used to purchase the security.
- There is a limit to the amount an investor can invest.
- Although safe investments have guaranteed returns, non-marketable securities do not allow for increased returns. They do not trade on secondary markets where volatility plays a significant role, making increased returns possible.
Some differences between non-marketable securities and marketable securities[1]
- Marketable securities are freely traded on secondary markets, while some non-marketable securities are traded in over-the-counter (OTC) markets. Non-marketable securities such as savings bonds are non-tradable
- Marketable securities are subject to daily price fluctuations, exposing investors to price volatility. Conversely, non-marketable securities are not exposed to price volatility but are subject to risks related to the lack of liquidity and transferability.
- A non-marketable security has an intrinsic value, but no market value. Depending on the type of non-marketable security, the intrinsic value can either be the face value (also referred to as the nominal value), the amount payable upon maturity, or the purchase price plus interest.
Contrarily, marketable securities have a market value.
*This article does not intend to provide investment or trading advice regarding non-marketable securities. Its aim is solely informative.
[1] See the article ‘Marketable Securities Explained for Dummies’, for more information about marketable securities.
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