What Is a Bond? A Simple Explanation
A bond is a type of loan — butinstead of borrowing from a bank, companies and governments borrow frominvestors like you. In return, they pay regular interest (called a coupon)and promise to repay the original amount at a future date.
Think of it this way: when a company orgovernment needs to raise capital, it can issue bonds to fund large projects,acquisitions, or day-to-day operations. Investors who purchase those bonds areessentially lending them money.
How Bonds Generate Returns
There are two primary ways investors earnmoney from bonds:
1. Interest Payments (Coupons)
Bond issuers typically pay interestsemi-annually, though some pay quarterly or annually. If you hold the bonduntil maturity, you’ll receive your principal back along with all the interestyou've earned over the life of the bond.
2. Capital Gains
Bonds can also be traded on the secondarymarket. If interest rates fall or the issuer's credit profile improves, thebond’s value may rise, allowing you to sell it for more than you paid.
For example, a $10,000 bond paying 6%interest becomes more valuable if similar new bonds are only offering 4%.Investors are willing to pay a premium for the higher yield, which increasesyour potential return.
Factors That Influence Bond Prices
Interest Rates
Bond prices and interest rates move inopposite directions. When interest rates rise, the value of existing bondstypically drops — and vice versa. That’s because newer bonds start offeringbetter returns, making older ones less attractive.
Credit Ratings
A bond issuer’s creditworthinessalso affects the bond’s price. If a company or government becomes morefinancially stable, its bonds are considered safer, and demand (and price) mayincrease. A downgrade, however, may cause prices to fall due to increaseddefault risk.
Types of Bonds in Australia
Australian investors have access to a fewdifferent bond categories:
Corporate Bonds
Issued by companies, corporate bondsusually offer higher interest rates to compensate for additional risk. Theseare ideal for investors looking for potentially higher returns — but they comewith a greater chance of default, especially from smaller or riskier firms.
Government Bonds
These are issued by the AustralianGovernment or state and territory governments. Because they’re backed bypublic institutions, they’re seen as very low-risk, but they also tend to offerlower yields.
Semi-government bonds (from state governments) fall into this category and are commonlyused for funding infrastructure projects.
Bond Funds and ETFs: Investing Withoutthe High Entry Cost
Buying individual bonds can be expensive.In fact, many wholesale bonds require minimum investments of $500,000 or more —not exactly retail-friendly.
That’s where bond funds and bondETFs come in.
These investment products pool money frommany investors to buy a diversified portfolio of bonds. They’re cost-effectiveand trade on the ASX like regular shares. Some examples include:
- Australian Government Bond ETFs
- Global Bond ETFs
- Corporate Bond ETFs
If you're looking for simple access to thebond market, this is often the best place to start.
How to Buy Bonds in Australia
There are three main ways to invest inbonds:
- Directly through a broker (usually for wholesale investors or institutions)
- Via the ASX by purchasing exchange-traded treasury bonds
- Through bond ETFs or managed funds
If you’re after a specific government bond,you might look into ASX-listed options like GSBE47, which offersexposure to a 3% bond maturing in 2047. For more diversity and flexibility,ETFs are often better suited to retail investors.
