What Are Government Bonds?

What are Government Bonds?

Government Bonds are generally referred to as sovereign bonds/ debt securities that are issued by a Government and that help investors get interest and returns on money they lend to the government under the above parlance. These can be bought and sold the way shares are and orders can be placed through a broker as well. Many investors try to time the buying with overall market scenario and volatility. These bonds thus help investors to sometime diversify their portfolio and fetch higher returns at lower risks.

Understanding Australian Government bonds: Australian Government bonds are generally considered as one of the most secured investment products and their returns form a benchmark for the markets across the globe. They are considered secured as the interest and principal payments are made by the Australian Government; and investors can put their money for lending or loan purposes at a fixed interest rate and for a specific period of time. The Government pays the interest and returns the principal at maturity by virtue of terms set under the bonds, and this provides a stable stream of income. This is sometimes done through banks. For instance, the Commonwealth Bank of Australia (ASX: CBA) issues certain bonds, usually called the Commonwealth Government Securities, which can be traded on the Australian Securities Exchange (ASX); and these are generally listed as Exchange-traded Treasury Bonds and Exchange-traded Treasury Indexed Bonds. Sometimes, referred to as Commonwealth Government Security (CGS) depository interest and Exchange-traded Australian Government bonds (AGBs), the bonds by CBA have gained a lot of traction among investors who look for diversification and broader risk distributions.

Given the scheme of bonds, these bond based investments are also referred to as liquid investments. More importantly, the investments set the theme for cash flow on a regular basis decided in relation to a maturity date. Some of them also help in diversifying investment portfolios and provide flexibility as a wide range of maturities can be accessed and maintained.

Exchange-traded Treasury Bonds: Exchange-traded Treasury Bonds represent debt securities with a fixed face value in terms of the amount you will get back at the time of maturity; and these are associated with an annual rate of interest that stays same over the life of security, though payable every six months.

Exchange-traded Treasury Indexed Bonds: These type of bonds are associated with a face value; and this value is being adjusted for movements in the Consumer Price Index and interest is paid to investors on a quarterly basis at a fixed rate. Now, the whole thing sets on this fixed rate, which is based on the adjusted face value. Thus, the amount of interest received by the investors becomes variable in this case.

Now, if at all the investors want to sell the Government bonds before the maturity date, then in that case, a specific value or rather, a market value, gets associated with the bonds. In other words, the market risks get to play a role and are associated with the Australian Government Bonds in terms of determining the market value that links the price the investors would have been prepared to pay for the bonds. It is to be understood that the market price will be dependent on economic developments and interest rates. This scenario might reduce the returns. Given this, many a times, Treasury Bonds get influenced by inflation while Treasury Indexed Bonds may still show some stability.

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Tax Associated with Australian Government Bonds: The assessable income received by the investors through interest/ capital gain is liable for tax payments under the Australian States’ law. However, Coupon Interest Payments on Exchange-traded Treasury Bonds (eTBs) are generally exempted.

Investors thus need to be vigilant in evaluating the amount of funds they have and investment position with the time frame they are willing to get invested for, in order to determine the type of bonds that suit them the best.


Disclaimer

This website is a service of Kalkine Media Pty. Ltd. A.C.N. 629 651 672. The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine Media does not in any way endorse or recommend individuals, products or services that may be discussed on this site. Our publications are NOT a solicitation or recommendation to buy, sell or hold. We are neither licensed nor qualified to provide investment advice.

 

 

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