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
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).
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. Find out more information about Exchange-traded Australian Government Bonds (AGBs).
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.