- April 25, 2024
- Posted by: legaleseblogger
- Category: Related News
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**Exploring Individual Exchange-Traded Bonds**
As a small time retail investor, my understanding of buying bonds was limited to bond ETFs and bond funds, which I found unappealing due to their low yields and exposure to capital losses/gains. However, I recently discovered that one can purchase individual exchange-traded bonds on the ASX, offering higher yields and lower risks. This has piqued my interest, but I need guidance on navigating this territory.
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**Understanding Bond Dynamics**
For fixed rate bonds, the face value remains constant at $100, while the current price fluctuates. This raises questions about the implications of these fluctuations on returns.
In examining two hypothetical bonds with different yields and prices, such as a 4.7% yield with a current price of $103 and a 3% yield with a current price of $75, the concept of face value versus market price becomes significant.
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**Deciphering Yield and Maturity**
The uncertainty surrounding the outcome at bond maturity prompts inquiries regarding the return on investment and the factors influencing it.
If the bond always matures at the face value of $100, does this mean investors receive the initial purchase price or the face value amount? Furthermore, is the yield calculated based on the face value or the purchase price?
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**Strategizing Bond Investments**
Delving deeper into the world of individual exchange-traded bonds raises questions on portfolio diversification, yield considerations, and the optimal number of bonds to acquire for a well-rounded investment strategy.
Should investors focus on high-yielding bonds or prioritize diversification by selecting bonds with varying expiry dates? How many bonds should be included in a portfolio for effective risk management and returns optimization?
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Seeking guidance from knowledgeable sources is crucial in navigating the intricacies of individual exchange-traded bonds and making informed investment decisions.
With the assistance of AI Legalese Decoder, investors can gain a deeper understanding of bond dynamics, yield calculations, and portfolio management strategies to enhance their financial literacy and investment success.
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The interest aka “Coupon” rate is fixed when the bond is issued on the market. For example you might see a zero coupon bond for a 5 year bond sold at 95 cents on the dollar.
This means u would get zero dollars interest for the life of the bond, and get the full face value 100 cents on the dollar at maturity.
If the bond was not zero coupon but 6%, you might have paid 101 cents on the dollar for it, get 6% interest a year and at maturity also get 100 cents on the dollar face value.
I have made these numbers up so they wouldnt actually be the case but just to serve as an example.
If you think about it intuitively, when rates go up the value of the bond goes down because you are locked into a fixed rate on the bond. Similarly if rates go down the bond goes up in value.
Personally i don’t buy Australian bonds, I just run ASX box spreads to lend my AUD out at the open market rate. The secondary bond market for ASX is a bit dry imo, would be a pain if you had to exit quickly. Alternatively, you might be interested in corporate paper like macquarie’s MBLPC but i havent looked too deep into that route.
One thing you might consider is also cash flow. Will you want cash staggered or do u need the 6% coupon for living costs? Then stagger it or go for the ones with a coupon. Currently i have box spreads for June, September and march 2025 because the first one will fall onto this tax year and the september one is for cash flow but thats just me YMMV.
FYI Box spreads for ASX (XJO) work in a similar way to a zero coupon bond, you pay a discounted value and at options expiry date you get assigned the full cash value settlement.
I’ll just paste a better explanation: https://www.reddit.com/r/fiaustralia/s/NF0rmLKGPN
In my opinion, bonds funds are still good as the defensive part of a portfolio since you can rebalance easily. You can sell bonds high and buy stocks low for example.
If you just want to preserve capital, individual bonds or term deposits are the way.
Individual bonds are less risk than a bond fund?