Bonds and government bonds, explained

A bond is a loan

Buying a bond usually means lending money to a government or company. In return, the issuer generally promises interest payments and to repay the amount borrowed at a set time. That promise still depends on the terms and whether the issuer can pay.

Bonds still move in price

Even if a bond pays a fixed amount, its market price can change before maturity. When interest rates rise, existing fixed-rate bonds usually become less attractive, putting downward pressure on their prices. Selling early can produce a loss.

Government and company bonds

Australian government bonds generally have different credit risk from corporate bonds. A higher advertised yield can signal more risk, not a free upgrade. Bond ETFs also have changing prices and may not behave the same as a single bond held to maturity.

Why would someone hold bonds instead of shares?

A bond normally promises payments under a contract, so it can behave differently from owning part of a company. That's one reason people research bonds when they want income or a different mix of risks. But it doesn't mean they're as safe or accessible as cash in a bank account.

If you buy a fixed-rate bond paying 3% and newly issued comparable bonds start paying 5%, your old bond is generally worth less if you try to sell it before maturity. If you hold an individual bond until maturity, payment still depends on the issuer meeting its obligations. A bond fund is different again because it continually holds and trades bonds.

Government bonds, company bonds and bond ETFs

Australian Government bonds are backed by the Commonwealth and generally carry lower credit risk than corporate bonds. Company bonds may pay higher interest because the borrower can be more likely to fail. Bond ETFs let you hold a basket of bonds but their unit prices can rise or fall as rates and bond values change. Some bond funds do not have a fixed date when you get your original money back.

1. Check the issuer or the fund's holdings and credit quality.
2. Find the bond's maturity, yield, interest-rate sensitivity and fees.
3. Understand whether you are buying an individual bond or a fund that holds many bonds.
4. Ask what job this investment would do alongside your cash and shares.

MoneySmart's bond guide is a useful place to read more.