What is a bond?
Bonds are a type of debt security. They are effectively an IOU between a borrower (the issuer of the bond) and a lender (the investor who purchases the bond) – just as a bank deposit is effectively an IOU between the bank as borrower and the depositor as lender. When a government, corporation or other entity needs to raise money, they can borrow money from investors by issuing bonds to them. Investors who purchase a bond from an issuer are essentially lending money to the issuer for a fixed period of time. In return, investors receive an instrument (the bond) promising that they will receive interest payments at certain intervals and also have their principal returned on a stated future date. Where the bond is quoted on a stock exchange, such as ASX, the investor can realise their investment by selling that bond to another investor at the current market price.
Bonds quoted on ASX
Just as you would instruct your broker to buy or sell shares in a company quoted on ASX, you can instruct your broker to buy or sell bonds quoted on ASX. There are a variety of types of bonds quoted on ASX. They can be broadly classified into the type of interest they pay (fixed, floating or indexed). They can also be split into categories based on the issuer (government or corporate).
Different types of bonds have different names and different acronyms. For example, bonds issued by the Australian Government and traded on ASX are often referred to generically as Exchange-traded Australian Government Bonds (AGBs), with the different types of bonds referred to as Treasury Bonds (TBs) and Treasury Indexed Bonds (TIBs). Bonds which pay a variable or floating rate of interest are often referred to as floating rate notes (FRNs). In fact, the bond market is rife with jargon and it is not always used consistently. For example, the term “note” is often used to describe a short term debt security but a “capital note” can be a very long-dated security. Review some of the jargon, some of the more common terms used in the bond market.
Your first choice for more information should be the ASX online course on Government bonds. You can also download the ASX education brochure 'Understanding bonds' 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.