Bonds can provide a stable source of income and can protect the money you invest. They are considered less risky than growth assets like shares and property, and can help to diversify your investment portfolio. Show What is a bondWhen you invest in bonds, you’re lending money to a company or government. In return, you get regular interest payments, called coupon payments. Bonds are generally viewed as a defensive asset and considered to be lower risk. They are still exposed to:
All bonds have a set value, called ‘face value’, when first issued. If you hold the bond until maturity, you get back the face value (or principal) of the bond. If you sell a bond before maturity, you’ll get the market value. This could be lower than the face value. Market value is influenced by:
Watch out for imposter bond investment offers. Scammers pretend to be from well-known domestic or international financial service firms and offer high yield bond investments. How to buy and sell bondsThe main issuers of bonds in Australia are the Australian Government and corporates. Always read the financial services guide and product disclosure statement (PDS) before you invest. Government BondsThere are two types of Government bonds: Australian Government Bonds (AGBs) and Semi Government Bonds (Semis). Australian Government Bonds (AGBs)AGBs (also known as Treasury Bonds) represent sovereign debt issued by the Australian government. They guarantee a rate of return if held until maturity. Exchanged-traded Treasury Bonds (eTBs) give fixed interest payments. Exchange-traded Treasury Indexed Bonds (eTIBs) give interest payments linked to inflation. You can buy and sell listed AGBs on the Australian Securities Exchange (ASX) at market value. You must pay any brokerage fees. To find out more, take the ASX online Government Bonds course. Semi Government Bonds (Semis)Semis represent semi sovereign debt issued by Australian states and territories. They can only be bought and sold through state and territory treasury corporations. Corporate bondsA corporate bond is a way for a company to raise money from investors to finance its business activities. Corporate bonds are primarily issued and traded on the over-the-counter (OTC) market. The minimum amount required to buy corporate bonds is typically large, up to $500,000. Consider the credit risk of corporate bonds before you buy. If the company goes out of business, you won't get coupon payments and may not get your face value back. Before you invest in a corporate bondIt is rare for corporate bonds to be issued to the retail market (allowing purchases below $500,000). If someone offers you a corporate bond be wary as it could be a scam. For any corporate bond offer, check:
Scammers may pose as a corporate entity, like a bank, and offer 'Treasury bonds'. This is a red flag that it's a scam. Corporate entities issue bonds in their own name. Only the Australian Government can issue Treasury bonds. Interest paid on bonds
How to work out the value of a bondYield to maturity (YTM) is a useful measure of the value of a bond. It is also a good way to compare what you'll get by investing in different bonds. YTM calculates the average annual return of a bond from when you buy it (at market value) until maturity. It assumes that you reinvest coupon payments in the bond at the same interest rate the bond is earning. Make sure you always balance the return against any risks before investing. Pablo avoids an imposter bond scam Pablo is looking for somewhere safe to invest the money from the recent sale of his house. He searches online using the term “best high yield investment” and finds an investment comparison website. He completes an online enquiry form on the website. Someone claiming to be from a well-known bank contacts him. This person offers Pablo “high-interest treasury bonds”. They say the bonds have a 5-year term, a fixed interest rate of 6%, and is price-protected under a government scheme. They email Pablo a prospectus. Pablo notices that the email is not from a bank email address. He checks ASIC’s Offer Notice Board to see if the prospectus is registered with ASIC. He doesn’t find it. He then looks up the bank’s website for more information and discovers a warning about imposter bond scams. Pablo decides not to invest with this person and blocks their calls. He reports them to ASIC. What is issuer specific risk?Issuer-specific risk — A security issued by a particular issuer may be impacted by factors that are unique to that issuer and thus may cause that security's return to differ from that of the market.
What is systematic and unsystematic risk?Unsystematic risk is a risk specific to a company or industry, while systematic risk is the risk tied to the broader market. Systematic risk is attributed to broad market factors and is the investment portfolio risk that is not based on individual investments.
What is individual stock risk called?Idiosyncratic risk, also sometimes referred to as unsystematic risk, is the inherent risk involved in investing in a specific asset, such as a stock.
What are the 3 types of risk?Types of Risks
Widely, risks can be classified into three types: Business Risk, Non-Business Risk, and Financial Risk. Business Risk: These types of risks are taken by business enterprises themselves in order to maximize shareholder value and profits.
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