Looking for income and diversification?
Australian government bonds can diversify your investment portfolio, whilst achieving a source of reliable and regular income. A strong economy means investments in Australian government bonds carry very low risk. As a result, Australian government bond yields are currently very low; lower in fact than some term deposit rates.
Australian Government Bonds are considered to be the safest investment in Australia and the government bond rate is sometimes called the “risk free rate”. They are a lower risk (therefore lower return) investment than term deposits and corporate bonds or XTBs over them.
Thankfully there is a way of making your cash work harder. If you’re looking for a low risk investment that provides an attractive and stable income, XTBs might be the answer.
XTBs vs. Government bonds
Corporate bonds typically offer higher interest rates than government bonds. An investment in XTBs enables investors to access the higher returns from corporate bonds and boost the income generation in their portfolio – a critical consideration with returns from many fixed income investments being so low.
What are corporate bonds?
If a company wants to borrow money to fund growth, or other investments, it has two options; borrow from a bank, or issue bonds.
Corporate bonds are basically IOUs that:
- Pay back the loan when the bond matures – known as the ‘principal’ or ‘face value’.
- Deliver a steady stream of income, normally paid quarterly or semi-annually throughout the life of the bond – known as the coupon.
Corporate bonds are difficult to access for most individual investors due to the high minimum investment – normally $500,000.
XTBs (or Exchange Traded Bond units), are securities traded on the Australian Stock Exchange (ASX) that give you exposure to the benefits of individual corporate bonds. You receive the same coupons and principal payment that you’d receive if you were to invest directly in a corporate bond.
- Coupons = regular, fixed income paid for the lifetime of the bond
- Principal payment = the amount you lend the company, paid back to you at maturity of the bond.
Easy to access, cost effective and flexible
XTBs trade in large and small parcel sizes, meaning they are accessible to all investors – not just those with very large portfolios. Because XTBs are traded on the ASX, they can easily be bought and sold at any time, so you can access your money at any time.
* In absolute terms, both Government bonds and XTBs are low risk. Government bonds are considered the lowest possible risk. Find out more about how to balance the choice of risk vs return.
**Some government bonds are available as AGBs.