Bond Investing
Bonds are fixed-income securities that represent a loan made by an investor to a borrower (typically a government or corporation). Bonds provide regular interest payments and return of principal at maturity, making them an important component of a balanced investment portfolio.
Bonds offer a way to generate steady income while preserving capital, making them particularly attractive for conservative investors and those approaching retirement who need reliable cash flow.
Why Invest in Bonds?
- Regular Income: Receive fixed interest payments (coupons) regularly
- Capital Preservation: Generally lower risk than equities
- Portfolio Diversification: Balance equity risk in your portfolio
- Predictable Returns: Known interest payments and maturity dates
- Inflation Protection: Some bonds offer inflation-linked returns
Types of Bonds
Government Bonds
Issued by the Australian government and state governments:
- Australian Government Bonds (AGBs): Issued by the Commonwealth
- State Government Bonds: Issued by state governments
- Treasury Bonds: Long-term government securities (typically 5-20 years)
- Treasury Notes: Short-term government securities (up to 1 year)
- Inflation-Linked Bonds: Returns adjusted for inflation
Corporate Bonds
Issued by companies to raise capital:
- Investment-Grade Bonds: Issued by financially stable companies (lower risk, lower yield)
- High-Yield Bonds: Issued by companies with lower credit ratings (higher risk, higher yield)
- Bank Bonds: Issued by major Australian banks
- Infrastructure Bonds: Funding for infrastructure projects
International Bonds
Diversify globally with bonds from:
- US Treasury bonds
- European government bonds
- Asian market bonds
- Emerging market bonds
Understanding Bond Characteristics
Coupon Rate
The annual interest rate paid by the bond issuer, expressed as a percentage of the bond's face value.
Maturity Date
The date when the bond issuer repays the principal amount to the bondholder.
Credit Rating
An assessment of the issuer's ability to repay the bond. Ratings range from AAA (highest quality) to D (default).
Yield
The return an investor receives, which can differ from the coupon rate depending on the bond's purchase price.
Risks Associated with Bonds
- Interest Rate Risk: Bond prices fall when interest rates rise
- Credit Risk: The issuer may default on payments
- Inflation Risk: Inflation can erode purchasing power of fixed payments
- Liquidity Risk: Some bonds may be difficult to sell quickly
- Currency Risk: For international bonds, currency fluctuations affect returns
Bond Investment Strategies
Laddering
Invest in bonds with different maturity dates to manage interest rate risk
Diversification
Spread investments across different issuers, sectors, and maturities
Duration Management
Adjust portfolio duration based on interest rate expectations
Bond Funds vs. Individual Bonds
You can invest in bonds through:
- Individual Bonds: Direct ownership of specific bonds
- Bond Funds: Professionally managed portfolios of bonds (see our Managed Funds page)
Our advisors can help you determine the best approach for your needs.