A bond is simply a loan, where the bond issuer borrows money from the bond buyer.
Bonds are usually set at a fixed amount of capital, with a set number of interest repayments over the life of the bond. The borrower pays the lender a premium (or coupon) with a fixed interest rate. These payments are made until the bond reaches maturity.
Consider this as an example — a three and 10-year Treasury bond with a $100,000 face value, and a coupon rate (interest rate) of 3%.
For buying this bond, an investor receives 3% ($3,000) every year, split over two payments, until the bond matures in 10 years. At maturity, the bond issuer (the government) needs to repay the face value — $100,000, in this example.
Bonds are a popular investment product for income-focused investors because of their regular and reliable income flows. Bonds are largely seen as a more stable option — rather than investing directly in shares — because it’s usually only well-established large corporations and governments who issue bonds.
This doesn’t mean investing in bonds is without its risks. Investors should consider the lender, the amount of interest and the maturity date before buying. Although the interest payments of a bond are set, it doesn’t mean that the bond will hold its value. As interest rates go up, the value of a fixed-rate bond goes down — and vice versa.
Bonds can be a helpful source of income and many corporate bonds offer high rates of return, depending on the issuing company. It is wise to research different companies in regard to the best bond yields, as the most profitable companies pose less default risk.
There are several exchange traded funds (ETFs) that give you exposure to a range of different bonds. And because they’re listed on the ASX, you can adjust the size of your investment according to your needs.
If you think bonds might be of interest to you, keep an eye on this page.
We’ll post articles on how the bond market works and show you how they could potentially be a useful investment strategy.