Real Estate Investor Magazine South Africa November 2013 | Page 53

BY JONATHAN SMITH

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R

CASH

The return which investors who place their
money in the bank or the money market
receive is termed interest.
Interest returns are largely dependent upon
the rate at which commercial banks borrow
money from the public and the central bank as
well the amount invested.

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That is, as the amount invested increases, so
the interest rate earned will increase.

Investment should always be understood as the foregoing of an amount of
money so as to earn a potential future return thereon from the proposed
investment. This means that investors within a business opportunity – including
property investors – allocate their cash resources (from equity and debt) towards
such investment opportunity in an effort to receive a future benefit, which, over a
period, is anticipated to be higher than the original outlay.

So if you invest R50 in the money market at a
return of 8% per annum, at the end of 12
months you will have R54. If you leave that R54
in the money market account, at the end of a
further 12 months, you will have R58,32. So
you have gained 32c on your investment from
the
interest the previous year, as well as R8
over the last two years.

4 TYPES OF INVESTMENT

bonds, including treasury bills
cash holdings
equities (via the stock exchange or privately owned)
property.

BONDS

Bonds are long-term debt instruments used by business and government to raise
large sums of money, generally from a diverse group of lenders. Typically, a
bond will have a stated (semi-annual) coupon interest rate and an initial
maturity of from 10 to 30 years at which time the par (or face) value of the
bond must be paid to whoever is holding the
bond at the maturity date.

If the credit standing of the ultimate payer
of a bond is considered intrinsically sound,
the anticipated payout of the bond is
considered to be risk-free. In South Africa,
one of our risk-free bonds is the RSA 186.
The contemporary rate that a risk-free bond
pays represents the risk free rate used to
discount future earnings to a present value
and adjusts periodically in accordance with
market sentiment as to future
inflation and business risk.

EQUITIES

(SHARES)

The purchase of shares in a private or public or public listed company
means paying one’s money into a company in return for the right to
receive a dividend, which dividend is normally dependent upon
the success of the company so invested in.

A bond is a long-term loan, which the initial
bondholder makes to the issuer for which the
bondholder receives a bond certificate. The bond
certificate is a promise to pay periodic interest at the
coupon rate as well as the loan value (par value) of
the bond to the bondholder at a point in the distant
future. The initial bondholder – as well as several
bondholders thereafter – will trade their certificates
(often termed “paper”) by selling their right to the
future interest income for a discounted, up-front
balloon amount. The subsequent bondholder then
becomes entitled to the cash benefits of the bond
until (s)he on-sells the bond to another person for a
further discounted, up-front balloon amount.

RESOURCES
Courtwell Consulting