How to Invest in Bonds?

As you may have noticed, we haven’t written a lot about bonds!

It’s not that we don’t like bonds, we do – bonds are good for diversification and as a counter-cyclical asset to shares (ie. bonds tend to do well when shares don’t), and to reduce risk and improve risk-adjusted returns.

That being said, we feel that most people should be able to adequately meet most of their long-term income needs with a combination of shares, commercial property, residential property and cash (ie. online savings accounts and term deposits), and with a relatively smaller allocation to bonds.

And while as you get older and your appetite for risk decreases it may be prudent to have a higher proportion of your total portfolio in bonds, you need to consider this allocation in the context of your expected life expectancy, as over very long periods of time the income received from holding a lot of bonds may not keep up that well with inflation.

As such, in our website and blog we are going to concentrate a lot more on discussing shares, commercial property and residential property, but will make occasional blog posts about bonds such as analysing the pros and cons of specific bond offerings that may come up from time to time.

In view of this, when writing this section of our website we decided to take a more pragmatic approach and rather than “re-invent the wheel” so to speak by writing this section from scratch ourselves, we are instead going to give you a detailed and step-by-step guide on how to rapidly get yourself educated and stay up-to-date on this particular asset class using the best free and online resources available.

So here we go…

Firstly, bonds can be classified under the broader category of interest rate securities, which includes “hybrids”.

While this section is mainly about bonds, hybrids are often discussed alongside bonds as they have many similarities to bonds, but they also have a few very important differences – particularly regarding risk levels, which can sometimes mean hybrids behave a lot more like shares than bonds.

Because of this, in some ways we feel that hybrids really should be discussed separately to bonds.

Nonetheless, we will include in this section links to discussions about bonds as well as hybrids for completeness and for those who are interested, noting that we will expand in more detail on the risks (and benefits) of investing in hybrids in a future blog post.

The best place to start then is the Australian Stock Exchange (ASX) free online education courses on bonds.

We suggest reading the following sections on bonds and hybrids:

1. Introduction to interest rate securities
2. Income – choosing the right security
3. Repayment and conversion
4. Corporate bonds/notes
5. Hybrids (1) Preference Shares
6. Hybrids (2) Convertible Notes
7. How to buy and sell interest rate securities

Then the following sections specifically on Australian Government Bonds (AGBs):

1. Introduction to Exchange-traded AGBs
2. Understanding Exchange-traded AGBs
3. Exchange-traded Treasury Bonds (TBs)
4. Exchange-traded Treasury Indexed Bonds (TIBs)
5. How to buy and sell Exchange-traded AGBs

The ASX has a further section on bonds here and hybrids here.

The ASX has bond prices list here and hybrid prices listed here.

The ASX also has a bond calculator here.

The Australian Government Bond website has more information on AGBs.

The Australian Securities and Investments Commission (ASIC) MoneySmart website also has a number of resources on bonds and hybrids:

Australian Government Bonds
Corporate Bonds
Investing in Corporate Bonds?

Hybrid securities and notes

The following sections on the Australian Investors Association (AIA) website also offers further concise explanations:

Interest Rate Securities
Government Bonds
Corporate Investments

We’ve also recently written a blog post about hybrids called The Role of Hybrids that may be of interest.

Now if you’ve managed to read through most of the above, you are doing pretty well, but there’s more…!

We’ve found a lot of regularly updated and useful educational material at the website of Fixed Income Investment Group (FIIG), such as their comprehensive publication The Australian Guide to Fixed Income and their Essentials Guide to Fixed Income.

You can also subscribe to their free weekly newsletter, The WIRE, to stay-up-to date on the latest bond and hybrid offerings, and have a look at all their back issues too.

We hope you find the above resources a good starting point for you education on bonds, as well as hybrids.

As we come across new resources that may be useful we will add them to this page.

Disclaimer: We do not currently use the services of FIIG or receive any benefit from mentioning them here.

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