There are only two types of bonds you can buy in Australia, but many different types of debt securities that also offer stable returns.
Corporate Bonds
These bonds are issued by private organisations, and can be bought either on the primary market or the secondary market. Typically bonds are issued when companies need more money thank banks are able to lend. They do this through a process called ‘bond issuance’.
For example, a company issues $100 million in bonds, each with a coupon rate of 6% and a face value of $10,000. These bonds are offered to investors to raise the $100 million that the company needs to fund their venture, split across multiple investors (creditors).
Corporate bonds vary in terms and creditworthiness, so you must understand the issuer’s creditworthiness and read their information merorandum, prospectus and/or annual report.
The interest payment on a corporate bond (known as a coupon rate) is usually higher than on government bonds because of the higher default risk.
Government Bonds
There are two main types of Australian Government Bonds (Treasury Bonds) listed on the Australian Securities Exchange (ASX). Each offer three or ten year “loan terms” (the maturity dates are three to ten years from the issue date): Learn more about the difference between corporate bonds and government bonds Find out more
Treasury Bonds (TBs): Fixed Interest Rate
These are medium to long-term fixed-rate debt securities. Interest is paid as a percentage of the original face value, paid at a fixed rate every six months, and the face value is repaid on the maturity date.
Treasury Indexed Bonds (TIB): Interest Rate Linked To Inflation
These medium to long-term indexed bonds are linked to the Consumer Price Index (CPI), which measures inflation.
Interest is calculated on the adjusted face value and is paid quarterly at a fixed rate. On maturity, investors receive the capital value of the bond.
Although not always the case, longer-dated bonds usually offer better interest rates because interest rates are more likely to change before maturity, making the risk slightly higher.
Learn more about the difference between corporate bonds and government bonds
Three advantages of investing in bonds
There are three key advantages to investing in bonds and other fixed income securities:
Predictable Income
These types of financial products are generally stable, passive and predictable. The interest rate is often fixed, which allows investors to plan cashflow, and for seniors can provide income flows throughout retirement.
Less volatility
Bonds and other fixed income products are generally lower risk investments than shares, as values are generally tied to financial and economic markets, with a greater risk of capital loss when major economic events cause share prices to drop. Generally speaking, bonds and other fixed income securities do provide a lower return on capital, however they do not carry the volatility risks. With shares, your investment could double – or halve – in one day
Diversification
Fixed income securities, like bonds, help to diversify your portfolio, as “defensive assets” that spread risk across your investment assets. This means that if your equity (shares) investments are having a “bad run” then the stable, lower-yield investments should still generate passive income.
Before investing in shares, bonds or other securities, make sure to seek the advice of a financial adviser, as insolvency law is complex and dependent upon different factors that can impact the outcome in a credit default or insolvency event.
The disadvantages of investing in bonds
Let’s look at the downside of investing in bonds.
Lower yields than shares
The potential yields on bonds and other fixed income securities is less than shares and other riskier financial assets.
Credit & interest rate risk
Long “loan terms” (maturity dates far in the future) increase the risk of rising interest rates, which in turn could impact the issuers credit risk as the interest rates on other debts increase.
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