What are Government Bonds?
Government bonds are highly secure investment products, where you lend money to the government (fixed face value) at a fixed interest rate (same annual rate of interest over the life of the security) and fixed term. The Government pays coupons (interest payments) at fixed intervals (e.g. quarterly, semi-annually) and returns your principal at maturity (end of term).
In Australia, bonds can be purchased from either Federal or State governments. The Federal Government issues bonds called Commonwealth Government Securities and are listed on the ASX as ‘Exchange-traded Treasury Bonds’ and ‘Exchange-traded Treasury Indexed Bonds’.
Exchange-traded Treasury Indexed Bonds differ to typical Government bonds, as they have a face value that is adjusted for movements in the Consumer Price Index (CPI). This ‘adjusted face value’ is known as the Nominal Value of the bond. This results in two effects:
- Coupon payments will be based off the Nominal Value instead of the face value (e.g. if Nominal Value increases because of inflation, the coupon payment increase).
- The amount returned at maturity will be adjusted according to the CPI at the date of maturity.
- Low risk – Coupon and principal payments are ‘backed’ by the Australian Government.
- Regular income – You’ll get quarterly or half-yearly interest payments
- Easy to buy and sell – You can buy and sell them anytime the ASX market is open
- Selling bonds – If you want to sell the bonds before maturity, they are subject to market value
- Inflation – Exchange-traded Treasury Bonds are affected by CPI