Bonds (also known as interest rate or debt securities) are securities that pay a fixed or floating rate of return. When you buy or subscribe for a bond, you are lending money to a corporation or other entity, known as the issuer.
The issuer of a bond usually promises to pay you a specified rate of interest (a coupon) during the life of the bond and to repay the face value (issue price or the principle) of the bond at a predefined time (maturity date).
There are two broad categories of bonds on ASX based on the issuer type:
- Government (currently Australian Government only); and
These in turn can be broken down into sub-categories and types. Each sub-category has different types of securities with different characteristics, benefits and risks.
Since May, 2013, retail investors have been able to buy and sell Exchange-traded Australian Government Bonds ("AGBs") as easily as they can buy and sell shares. It pays to know the ins and outs of these highly secure investment products. ASX has developed a free online course to help you familiarise yourself with the products and market.
Your first choice for more information should be the ASX online course on Government bonds or the course on interest rate securities. You can also download the ASX education brochure "Understanding interest rate securities" or listen to an Investor Hour podcast on ASX Interest Rate Securities to learn more.
The Australian Securities and Investments Commission (ASIC) has also developed a guide on investing in corporate bonds, which may help you to better understand the risks and benefits of investing in corporate bonds. The guide covers what corporate bonds are, how they work, what the risks are and provides a checklist of things to look for when investing.
- More about Exchange-traded Treasury Bonds (TBs)
- More about Exchange-traded Treasury Indexed Bonds (TIBs
- ASX Bond Calculator
- List of Exchange-traded AGBs - including ASX codes, term sheets and charts
- Market reports and key information.
Benefits of investing in bonds
The investment return on a bond reflects its interest payments and any appreciation in its price from interest rate movements. As a general rule, the capital gain potential of bonds and FRNs is rather modest compared with other investments. So why are they such popular investments? The main reason is that unlike equities, they provide greater certainty as to their regular income stream. For retirees or others needs a predictable source of income, a debt security’s income payments provide a comforting level of security. But there are other advantages to, including:
- investment diversification, which can reduce risk as well as improve a portfolio’s overall rate of return. With bonds and FRNs as an anchor for a portfolio, an investor may feel more comfortable taking on greater risk with other investible assets in hope of achieving a greater return
- improvement on the return on your capital which may typically be held as cash. Income from bonds and FRNs is typically higher than interest paid on bank deposits; and
- in the case of an investment in a government bond, their investment being in a highly liquid and secure form
- opportunity to profit from expected movements in interest rates
The distinguishing characteristics of bonds
There is a range of terminologies used to describe the types of bonds, which may refer to a key feature of a particular type of bond. Find out more about the distinguishing characteristics of the two broad categories and the sub-types within each category.
Finding a broker
If you’re already using a broker to buy and sell shares, they may also advise on bonds. However if your existing broker is not active in the bond market, you may need to find a specialist broker in this area.
Bonds have risks that investors should be aware of before investing. These risks include:
- For a Corporate bond, the company being unable to pay the promised coupon, or repay the face value at maturity (issuer risk);
- Your income being affected by an unfavourable movement in market interest rates (interest rate risk);
- Being unable to sell your securities for a fair price (liquidity risk).
You should obtain independent advice from a professional adviser prior to making any final investment decision.