Investing in bonds australia
So what are bonds , well its definetly not this ( Bonds ) nor is it this (Bond J) but according to investinginbonds.com “A bond is a debt security, similar to an I.O.U. When you purchase a bond, you are lending money to a government, municipality, corporation, federal agency or other entity known as an issuer.* In return for that money, the issuer provides you with a bond in which it promises to pay a specified rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due”.
One of the very first questions that investors who are familiar with shares and funds but not bonds ask is: “Where do I buy bonds?” The bond market is not centralized and there is no bonds freely available like for the stock market. There is no equivalent of the ASX for trading bonds in Australia . Bonds are mostly an over-the-counter (OTC) market where third parties, known as brokers, connect the buyers with sellers.
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Investors wanting capital stability, reliable returns and protection against cyclical downturns are often advised to consider adding bonds to their portfolio. Bonds are a very popular form of investment in the us by the general stock market investors as well as the big managed funds. Investing in Equity is easy, you either buy off the prospectus or off the secondary market (ASX, NSX etc)
After you decide to invest in bonds, you then need to decide what kinds of bond investments are right for you.
Depending on your goals, your tax situation and your risk tolerance, you can choose from municipal, government, corporate, mortgage-backed or asset-backed securities and international bonds. Within each broad bond market sector you will find securities with different issuers, credit ratings, coupon rates, maturities, yields and other features. Each one offers its own balance of risk and reward.
Australian Bond investment Options
There are also a number of large, well-managed banks with diverse global operations, higher capital levels. The high credit quality of these banks, in particular the four major Australian banks( CWB,WBC, ANZ, NAB), HSBC and Rabobank, represent a very low credit risk for investors looking to build a bond portfolio.
Until recently, most bonds were only available in face value parcels of $500,000 but often they can be also be traded through a fixed interest fund. There are a few retail bonds available for less, but the broader market was closed to most retail investors. Some brokers, including FIIG, now offer a service whereby investors can access bonds in parcels of $50,000 each offering more choice, control and diversification without the need to access fixed income through managed funds.
Hybrid/preference shares Australia
A lot of bank issuing “hybrid/preference shares”, which pay a coupon like a bond, and have a fixed face value like a bond. But are actually classed as equity, so if the company decides not to pay a dividend, you get nothing. So these could be more risky then a bond. Government bonds are like no other security in that they are not linked to performance of the economy and so provide diversification and a hedge against economic downturn in a portfolio. “Australian Commonwealth Government bonds” are considered “risk-free” important for those investors that want capital certainty and a regular income.
You can get 7-10% return from bonds, that beats a bank account, and it is a lot safer then shares.
Also if interest rates are falling, then bond prices will be going up, so you will get “capital growth” as well. (You do not get this on hybrids, as the interest rate is not fixed.)
What is a bond ? ( for dummies)
Companies and governments issue bonds to fund their day-to-day operations or to finance specific projects. When you buy a bond, you are loaning your money for a certain period of time to the issuer, be it General Electric or Uncle Sam. In return, bond holders get back the loan amount plus interest payments.
When interest rates fall, bond prices rise, and vice versa. If you hold a bond to maturity, price fluctuations don’t matter. You will get back the original face value of the bond, along with all the interest you expect.
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Buying and selling bonds
You will need to find a broker or financial intermediary to trade because the bond market is largely over-the-counter (OTC). Wholesale bonds, like the Rabobank bond or the HSBC bond trade in minimum face value parcels of $500,000.
While there are a few retail bonds that can be traded in $5000 face value parcels, some brokers have access to a range of bonds that can be traded in $50,000 or $100,000 parcels, providing greater opportunities for diversification. Commonwealth Government bonds and semi-government bonds can be traded in small parcels of just $1000.
There are no fees involved in buying or selling bonds, rather the broker makes a margin between the bid price and the offer price when the transaction is agreed. Buyers and sellers are quoted prices inclusive of the margin , but this can differentiate between brokers.
Insurance bonds in australia
Referred to as tax-paid investments, insurance bonds in Australia are taxed by the fund manager at the corporate tax rate of 30% subject to being held for a minimum of 10 years and do not need to be reported on an investor’s tax return. Where insurance bonds (or investment bonds) are withdrawn within ten years of the investment initially being made, additional tax may be payable by the investor. Investment bonds typically have entry fees of 3%-4%, charged on every contribution including regular savings plans
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Thanks for the useful blog. This is a confusing topic but you lay it out in an easy to understand way.