Aussie bonds: when boring is good

Keary has some rules to consider first though. “Make sure you know what you’re investing in,” he says. “One of the things I’m very passionate about is transparency. Make sure you know what the money is going to be used for, that the company has a rating, and stick to quality names you know about.” In practice, for him this means the ASX50 companies and he sees little need for individual investors to go overseas. “What is the investor trying to achieve? If it is just yield style exposure, can they get that via a corporate bond or hybrid from a company in Australia that they already know well?” Going overseas brings foreign exchange risk too, he says.

BOX: How do you buy?

There are many ways Australians can get exposure to bonds.

In many cases, they can do it themselves. To buy an Australian government bond, you simply fill in a purchase form and an identification reference form (both available from the Reserve Bank of Australia website) and take it with ID and your money to the Reserve Bank’s Sydney or Canberra branch, or mail it to the Registry of Inscribed Stock. The minimum investment in government bonds is A$1000.

Corporate bonds vary depending on whether they involve a prospectus. For deals in hthe market like the one from AMP, ordinary investors can subscribe for as little as $5000. But if they’re not under a public prospectus they are issued in parcels of at least $500,000. Most corporate bonds do not trade on the ASX but through other intermediaries in what is known as an over the counter market.

Hybrid issues are usually traded on the ASX and can be bought and sold like any share.

BOX: Bonds explained

Consider a bond an IOU. You lend your money to a company or a government. They promise to pay it back and to pay you some interest – called a coupon – periodically over the time that it borrows the money until it pays you your money back. Bonds can be of many different lengths, or tenors, from a month (though for tenors of less than a year they are more commonly called money market securities) to as long as 100 years. Having been launched, bonds then typically are also traded in the capital markets.

The coupon is generally set at the outset, though in some bonds it can change over time and in others, called floating rate notes, it depends on movements in some other index. But it is more common to hear people refer to the yield – the annual rate of return if you hold the bond until its maturity. The yield depends on the coupon, the length of time left until the bond matures, and the market price. So the yield looks at the total return to the investor.