Bonds

P

Phiber

Hi guys,

Just wondering if any of you are invested in bonds? Government or else.
I have been trying to find what rate they pay but I can't get my hands on any reliable data.
I'm wondering how they are performing against term deposits these days.

Keen to hear any feedback you guys might have.

Ta
 
You have to distinguish between bonds and term deposits. They may seem similar but they are not.

Term deposits are also known as 'cash' because you put it in the bank, earn X% interest, and you can withdraw it later for the interest+principal. Simple.

With bonds, you invest your money into a bond (issued by a government or a corporation) with a promised interest rate as well. However, the value of this bond will fluctuate from day to day in accordance with the yield curves, interest rate environment etc. This affects what the yield on the bond is, since the actual 'interest rate' or 'coupon rate' is fixed from day 1 that the bond is sold. Therefore investing in bonds is not just about the coupon rate, but about the capital gain you can derive from selling the bond prior to its expiry. The capital gain can arise if say interest rates fall so a bond with a higher coupon rate has greater attraction. If you hold the bond to maturity, you get your investment back (plus interest along the way) but most people do not hold them to maturity.
 
Aaron_C said:
If you hold the bond to maturity, you get your investment back (plus interest along the way) but most people do not hold them to maturity.
Click to expand...

As some who could write their entire understanding of bonds on the back of a postage stamp, can I ask why people don't hold them to maturity? Is it because the potential increase in capital value outweighs the future interest?
 
VYBerlinaV8 said:
As some who could write their entire understanding of bonds on the back of a postage stamp, can I ask why people don't hold them to maturity? Is it because the potential increase in capital value outweighs the future interest?
Click to expand...

Usually it's because the purpose of buying the bonds was for capital gain, i.e. it's a way to trade interest rates.
 
Aaron_C said:
You have to distinguish between bonds and term deposits. They may seem similar but they are not.

Term deposits are also known as 'cash' because you put it in the bank, earn X% interest, and you can withdraw it later for the interest+principal. Simple.

With bonds, you invest your money into a bond (issued by a government or a corporation) with a promised interest rate as well. However, the value of this bond will fluctuate from day to day in accordance with the yield curves, interest rate environment etc. This affects what the yield on the bond is, since the actual 'interest rate' or 'coupon rate' is fixed from day 1 that the bond is sold. Therefore investing in bonds is not just about the coupon rate, but about the capital gain you can derive from selling the bond prior to its expiry. The capital gain can arise if say interest rates fall so a bond with a higher coupon rate has greater attraction. If you hold the bond to maturity, you get your investment back (plus interest along the way) but most people do not hold them to maturity.
Click to expand...

So buying bonds when interest rate is high is a bit like locking into a fix rate mortgage when interest rate is low?
 
evan1875 said:
So buying bonds when interest rate is high is a bit like locking into a fix rate mortgage when interest rate is low?
Click to expand...

Except that you can get a 'negative break fee' (i.e. the bank pays you to break the lower rate) if you sell the property and repay the loan when rates are higher (in the case of bonds, lower).
 
Phiber said:
Hi guys,

Just wondering if any of you are invested in bonds? Government or else.
Click to expand...
images


Long time ago but it was a "Bond",but he taught me the simple rules,,
'Trust No One and every cent i lost with his companies i have made back
thousand times over..
 
Aaron_C said:
You have to distinguish between bonds and term deposits. They may seem similar but they are not.

.
Click to expand...

Hi Aaron_C

How about Certificates of Deposits from Banks?

Re: Bonds

In Australia…

•Since 1970 cash has returned 8.9% and Australian bonds 8.7% per annum.
•Since 1985 cash has returned 8.2%, Australian bonds 9.9% and International bonds 11%.
•Since 2000 cash has returned 5.5%, Australian bonds 6.8% and International bonds 8.1%

Since 1980, we have had 10 calendar years of negative performance in equities, in eight of these years Australian bonds have outperformed cash, and typically by a large margin

source: Vanguard
 
Phiber said:
Hi guys,

Just wondering if any of you are invested in bonds? Government or else.
I have been trying to find what rate they pay but I can't get my hands on any reliable data.
I'm wondering how they are performing against term deposits these days.

Keen to hear any feedback you guys might have.

Ta
Click to expand...

Have a look at the individual sites or Morningstar and InvestSmart for Vanguards Bond Index ETF(VGB) , iShares UBS Composite Bond (IAF), iShares UBS Government Inflation (ILB), or iShares UBS Treasury (IGB)
 
Hi guys,

I didn't expect that much interest in the bonds topic, but that's good!
I am pretty new to this but have heard it mentioned time and again and thought it was a good time to have a hard look at this option to see whether I want to hold part of the portfolio in bonds.
As Aaron has pointed out, I have little knowledge of the topic and was unaware of the trading of interest rate going on.
I was mainly seeing that as a comparable product to Cash which it seems to be if one waits until maturity.

Redwing's comment outlines bonds have outperformed cash in recent years and by quite a significant margin on average.
I still have an issue understanding the difference between the coupon and the yield and not sure which one I should be looking at.

Hobo's link has a good link to bloomberg that shows yields for aussie gov bonds. These are currently 3.39% for a 15 yrs (!) term. When the interest rates are sitting as 3.25%, any online saver account or term deposit beats this figure.
So i must get my yield wrong. RBA gives this definition "The yield quoted by the Reserve Bank is the 'yield to maturity', which represents the annual rate of return, expressed as a percentage, if the security is held to the maturity date." - seems to be pretty much the same as an interest rate on a term deposit. Of course this takes out what Aaron has explained about varying value and considers only bonds held to maturity. Or is the yield a daily figure updated as the value of the bond changes daily?

Well, I'm kinda lost on this one guys - anyone to help me figure it out?

cheers
 
Hi Phiber,

Govt bonds are usually the lowest interest rates AFAIK, that is why I ended up in NT bonds. As the NT is a commonwealth territory all it's borrowings are federally guaranteed and they pay an extra 1% usually.

All other investments are deemed to be higher risk than Govt bonds. Traditionally there has been "no risk of default" with AAA govt bonds, until the GFC and Greece etc.
 
Phiber - bonds appear simple but they are not. The 'Yield To Maturity' is a figure quoted which takes into account the price paid today, the future coupon/interest payments and the payment of face value at maturity. I simply can't explain everything on a forum like this as it is a bit more involved! Besides, the 'performance' of bonds is an illusory concept, since the 'return' on bonds doesn't necessarily include capital gains but only quotes the coupon rate when they are issued, which becomes irrelevant when they reach the open market. Holding a bond to maturity will give you a 'return' but hardly anyone does this.
 
Phiber said:
Hi guys,

Just wondering if any of you are invested in bonds? Government or else.
I have been trying to find what rate they pay but I can't get my hands on any reliable data.
I'm wondering how they are performing against term deposits these days.

Keen to hear any feedback you guys might have.

Ta
Click to expand...

nope not interested at all. you missed the party by about 20 years (but dont feel bad, so did i)
 
Bond Prices don't worry us too much, currently investing via a Bond Index ETF which provides a bit of stability in the portfolio and opportunities in volatile markets
 
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