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When you invest in the bond market, you're essentially lending money to a business or to the government at a fixed interest rate.
While you can’t usually expect the same high returns by investing in bonds as you get from shares, you can expect a lot more security. For this reason, the bond market does especially well as the share market becomes more volatile and interest rates fall.
If you're ready to start investing in bonds, there are several avenues that you can take, including wholesale investing via a company or broker, and through investment products listed on the ASX, such as exchange traded bonds and bond-themed exchange traded funds (ETFs).
Simply put, a bond is a loan and you're the owner of the debt to be paid.
This loan can be to either a government or to a company. In return, you receive interest payments on your investment on a regular basis, with the principal amount paid back to you at the end of the term. The rate of return is known as the coupon rate.
Where shares normally return value as the stock markets rise, bonds act as a counterweight to a portfolio because they tend to do better when the economy is underperforming, even if 2022 proved the exception to this rule.
When it comes to bonds, they are scaled based on risks of repayments. The lower the risk, the less the reward in terms of the coupon rate. If a bond is rated triple A, then it's likely the debt issuer will pay, meaning the interest rate falls. Anything lower than a triple-B rating is usually considered a junk bond and the rating can go as low as D. Before making a choice, you should carefully compare your options as some will pose more risk than others.
In Australia, you have a few different options when investing in bonds. Each choice has its own risk and return potential, making it important that you compare your options carefully before deciding on any product:
A bond’s capital value can increase or even decrease before the maturity date based on current interest rates. The amount of interest accrued since the last payment will also have an effect on the value of a bond. If interest rates drop, you will see an increase in the value of your bonds. When they rise, the value of your bonds will drop as a result. These fluctuations are only relevant if you have invested in floating rate bonds as opposed to fixed rate bonds.
You can invest directly in bonds either over the counter (OTC) or via the Australian Securities Exchange (ASX). In both cases, you'll be required to have a broker or fund manager. OTC bond investing usually requires a high minimal investment (upwards of $500,000). However, your rate of interest and return is guaranteed for the life of your investment. Investing in bond products via the ASX means you can invest for as little as a few hundred dollars through a broker or online trading platform.
Indirectly you can also invest in bonds through a bond-themed managed fund or exchange traded fund (ETF). If you're investing in an ETF, you can do so with a stock broker or online trading platform. To invest in an unlisted managed fund you can apply to invest directly through the fund manager.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
If you're looking to invest in bonds, you can do so directly on the ASX. An easy and relatively cheap way to access the bond market is through exchange traded funds (ETFs) or exchange traded bonds (XTBs + ETBs). These products can be bought and sold on a stock exchange through an online trading platform or a full-service broker. If you're considering investing in bonds through an online broker, be aware that there may be additional risks involved – especially if you don't understand the product.
There are 5 main ways to invest in bonds:
An alternative to buying bonds is to speculate on their price movements through CFD investing in the futures market. CFD investors seek to profit from bond price movements – whether up or down.
That means that even if bond values are falling, CFD investors can still make a profit. However, because CFDs can be highly risky and are complex derivative products, CFDs are better suited to advanced traders. You can read more about CFDs in our comprehensive guide.
However, it's worth pointing out that CFDs are more sophisticated trading products and are more risky than traditional bonds.
Are you thinking of moving your funds from a savings account into government bonds? If so, there are several considerations you need to be aware of, such as the bond's maturity date and minimal investment requirement. Below are some pros and cons of investing in bonds versus keeping funds in a savings account.
Remember, before you get started, it pays to assess your financial situation to determine whether investing in government bonds is right for you.
Even though bonds are considered to be one of the least risky assets, it all depends on what you invest in.
There's a range of bonds, from triple-A rated bonds to D. A triple-A bond is usually a government-backed bond and it's incredibly likely the entity will repay. This also means the rate of return will fall as your money is theoretically more secure.
On the other end of the scale are D bonds or default bonds. These are bonds that have missed a principal and interest repayment. The risk of defaulting increases during economic downturns.
If you're looking to reduce risk, you can do so by buying higher-quality bonds.
Another key risk to bond investors (especially in today's market) is rising interest rates. Usually, interest rate rises mean the value of a bond falls because investors can simply hold cash, making the bond less attractive as an investment option.
Investors who purchase bonds will be subjected to similar tax rules like any other asset class.
As such, they will be required to pay capital gains taxes on all profits made.
According to the Australian government's site, Coupon Interest Payments on exchange traded Australian government bonds (eAGBs) are exempt from non-resident interest withholding tax.Back to top
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involve substantial risk of loss and therefore are not appropriate for all investors. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
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