A bond is a kind of debt security in which the issuer owes the holders a fixed amount of money at a specific date and pays periodic interest payments to them. Governments or corporations usually issue Bonds. When a bond matures, the issuer must repay the bond’s face value to the holder.
Bonds are very popular investments and can be bought and sold on secondary markets. They are considered relatively low-risk investments because the issuers are typically large, stable companies or governments. However, bonds can also be riskier than other types of investments, particularly if the issuer defaults on its payments.
Various types of bonds are available in Australia, including government bonds, corporate bonds, and mortgage-backed securities. Australian bonds are usually issued in denominations of $100,000 or more.
Bonds are Considered Low-Risk Investments
Bonds are one of the most popular investments and are considered relatively low-risk. This is because the issuers of bonds are typically large, stable companies or governments. However, bonds can also be riskier than other types of investments, particularly if the issuer defaults on its payments.
You Can Buy or Sell Bonds on Secondary Markets
Bonds can be bought and sold on secondary markets, which means they can be traded between investors. This provides investors with a way to sell their bonds if they need to raise cash quickly or buy additional bonds to increase their portfolio’s exposure to a particular security.
Various Types of Bonds Are Available in Australia
There are various types of bonds available in Australia, including government bonds, corporate bonds, and mortgage-backed securities. Most Australian bonds are not traded on secondary markets; instead, the issuer sets their prices at the time of issue, although some investors may choose to trade these directly with each other.
Bonds Issued in Denominations of $100,000+ Usually Traded on Secondary Markets
Most Australian bonds issued in denominations of $100,000 or more are regularly traded on secondary markets. This means that they can be bought and sold between investors on an exchange, enabling individual buyers and sellers to connect with others more easily than they would be able to if trading directly with the issuer.
Trading Bonds on Secondary Markets More Liquid
Trading bonds issued in denominations of $100,000 or more on secondary markets means they are easier to buy and sell than trading directly with the issuer. This is because all investors interested in buying or selling a particular bond can connect with one another through an exchange rather than relying on the issuer to match them up.
The Prices of Bonds May Rise and Fall Over Time
The prices of bonds will fluctuate over time as interest rates change. When interest rates are low, it might be difficult for issuers to repay high-interest debts such as bonds, so their value may drop significantly. Conversely, when interest rates are high, it might be difficult for investors to find bonds that offer a good return on investment, so their prices may rise.
Bonds Are a Good Way to Diversify a Portfolio
Bonds are a relatively low-risk investment and can help diversify a portfolio. This is because they are not as volatile as other investments, such as stocks. When combined with different types of less-risky investments, such as cash or fixed deposits, bonds can help protect a portfolio from significant losses if the overall market drops. You can even trade bonds online.
Bond Issuers Can Default on Their Payments
Although it is rare for issuers of bonds to default on their payments, it does happen from time to time. This can be devastating for investors who have bought these bonds as they may lose a significant proportion of their initial investment. Although the Australian Government guarantees some corporate bonds against default, this protection is not offered to all bond issuers.
Interest Payments Are Taxed Differently
Interest payments on bonds are taxed differently from other income types, such as dividends or capital gains. For example, interest on government bonds issued in Australia is generally exempt from tax; however, interest on private companies or mortgage-backed securities (MBS) is only partially tax-exempt.