Bonds: Learn How to Invest in Them

In the world we live in, many of us are constantly looking for ways to improve our income and to make it steady, as we all want to be able to live a comfortable life, full of enjoyable moments to remember. Besides working in our regular jobs, an alternative to make an extra income has always been investing, and one of the main tips in an investor’s life is to diversify.

That being said, bonds represent one of the possibilities for those who are looking for ways to create a diverse portfolio while reducing risks and producing returns. Whether your plans are to invest in government bonds or corporate ones, in this guide you will build a better understanding about how they work and some of the options available.

So, wait no more, and let’s begin this journey!

Understanding What Bonds Are

Let’s imagine there is some extra money you have been keeping to yourself, but your son arrives home and asks to borrow this amount in order to pay some debts, while promising to pay you back at a set date with a little extra, as a way to thank you for your help. Can you picture that? Well, this is in some ways very similar to what buying bonds can mean.

Basically, when you buy a bond, you are loaning your money to the government or to a private company, which will return the full amount in a set period of time and pay you regular interest while doing it. This investing option is considered to be stable and less risky, which means it can be ideal for more conservative investors or for someone that is just beginning their journey in the finance area.

Face Value vs Market Value

There are a few factors and terminologies you should be familiar with while investing in bonds. One of them is what we call “face value,” which is basically the amount your bond is worth when issued. This expression is important, because if you hold your bond until it reaches maturity, you will get this full amount back.

On the other hand, if you decide to sell it before it reaches that level, you will receive the market value, which can be higher or lower and is influenced by interest rates, liquidity, the time left until your bond reaches maturity, and the credit risk of the issuer.

Buying Government Bonds

While thinking about investing in this area, you should consider that there are different ways to do it: Australian Government Bonds (AGBs) and Semi-Government Bonds (Semis). In the case of Semis, these are typically issued by state and territory governments and are more commonly traded by institutional investors, often through state treasury corporations or the over-the-counter (OTC) market. Retail investors may have limited access, so keep that in mind if you’re considering this option.

There are also the AGBs, which represent debt issued by the Australian Government. Within this type of investment, you’ll find Exchange-Traded Treasury Bonds (eTBs) and Exchange-Traded Treasury Indexed Bonds (eTIBs). While eTBs offer fixed interest payments, eTIBs provide payments that are linked to inflation, helping to protect the value of your investment over time.

For further and detailed information about how to invest in government bonds, please consider accessing the Australian Government Bonds and the Australian Securities Exchange web pages, as they can provide other specific data.

Buying Corporate Bonds

Here is what you need to know about corporate bonds: they work similarly to the government ones, but the main difference is that they are a way for a company to raise money in order to finance its activities. Some corporate bonds, especially those traded on the over-the-counter (OTC) market, may require high minimum investments — sometimes up to $500,000 — which can represent a big investment for most people, as not everyone is able to start with such an amount.

This kind of bond is issued on the OTC market — which is basically a market where financial products are traded between two parties — and you should definitely consider looking at the credit risk before investing, since if the company of your choice goes out of business, you won’t receive any coupon payments and may not even get your face value back.

Another thing for you to keep in mind is that while looking for places to invest, scammers may try to approach you with unreliable offerings. Make sure to take some time browsing the Australian Securities and Investments Commission’s (ASIC) offer notice board (which is available online), and if there is no information about it there, you have enough reason not to trust the offer.

Always look for legitimate sources, as your security must be the first thing you care about.

Now, How Exactly Does Bond Interest Payment Work?

We know! This is one of the things you were most eager to hear about. And here we are! To understand this topic, let’s think about three different possibilities of investing in bonds and their interest payments: fixed rate bonds, floating rate bonds, and indexed bonds.

Starting with the fixed rate bond, you should expect that the interest rate will be set when it is issued and will remain the same until it reaches its maturity. If you decide to keep your bond until this time, you will receive the face value back completely.

Now, talking about the floating rate bonds — as the name suggests — they work a little bit differently, since they can change both up and down during the term of the bond. The coupon rate received by you will be based on an underlying interest rate, and in addition to that, a specified percentage/margin. In this case, you will also get the face value back if you decide to keep it until it reaches maturity.

Last but not least, there is also the indexed bond, which is protected against inflation, although inflation adjustments can also affect the real value of returns. If you choose this option, you should expect your returns to be indexed to the Consumer Price Index (CPI), and that your coupon payments and the face value of your bond will increase according to changes in the CPI.

Conclusion

A lot was said in this article, and I am sure you have many words and expressions swirling in your head right now, but don’t worry! Take your time to think and make a safe decision.

You should also remember that if bonds are not what you imagined they would be, there are certainly other ways to invest, as this is just one among many possibilities. However, if you enjoyed getting to know more about them, maybe this could be a way for you to start.

Remember, researching is never too much, and by doing so, you will only become more well-informed and confident to make your choice.

And if you’re new to the world of investing, don’t stop here! Take the next step and check out our article Investment tips for beginners. It’s full of practical guidance to help you build confidence, understand key strategies, and make smart choices as you begin your investment journey.