Investing in bonds
by Wealth Know How in DIY Investing
Just what does it mean to invest in a bond? When is a bond a sound investment and what are the risks? In this video we discuss all this and more to give you an overview of this important part of a diversified investment portfolio. Not all bonds are the same and there are many factors to consider before making a decision
- sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
Published on 25 Jul 14
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Just what does it mean to invest in a bond? When is a bond a sound investment and what are the risks? In this video we discuss all this and more to give you an overview of this important part of a diversified investment portfolio. Not all bonds are the same and there are many factors to consider before making a decision
Sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
-
Venezuela tension heats up
Duration 03:16
-
Aussie dollar surprises market
Duration 03:10
-
Markets climb as investors watch US healthcare bill
Duration 02:31
An Australian government bond is considered risk-free, if you know that you will hold it to maturity. If for some reason you need to sell it, you could make a capital loss, depending on where bond prices are – which will depend on where interest rates have moved in the meantime, which in turn depends on the health of the economy. If rates have risen, your bond could be worth less on the market.
Bonds have a face value, which is the amount you will get back at maturity, and a coupon amount, which is the interest paid each year. The coupon can either be at a fixed rate or floating-rate. The payment may be divided into half-yearly or quarterly amounts.
You can invest in bonds via managed funds or directly through listed bonds on the ASX. Also, some bond brokers break down wholesale government, semi-government and corporate bonds into smaller parcels.
Bonds are an important part of a diversified investment portfolio, as a defensive investment, as well as a source of regular income. They sit with conservative investments such as term deposits, but with more risk.
But not all bonds are the same, they range from very safe to quite risky. Some corporate bonds are high-yielding bonds, but carry quite high risk.
Over the last 25 years some high-quality fixed-rate bonds have provided comparable, and in some cases, better than average returns, compared to Australian and international shares and listed property. They have also been less volatile than shares, with fewer years of negative performance.
Some bonds have their interest payments indexed to inflation, offering investors protection against inflation. These “linkers” may pay a lower interest rate for the life of the bond to compensate for this protection. If inflation rises, the capital value and/or the coupon of the linker will rise, and vice versa.