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What are government bonds?

What are government bonds?

Would you lend money to the government? Australian government bonds are considered to be a very low risk investment product.

Investors lend money to the government for a set period of time at a pre-determined interest rate.

When a government issues bonds it will generally make regular interest payments during the life of the bond and repay the initial investment, or principal, when the bonds expire on their ‘maturity date’.

The Commonwealth of Australia issues bonds called Commonwealth Government Securities, which tend to pay a lower rate of interest than corporate bonds.

This is because the Australian government is generally considered to be of lower risk than companies that also issue bonds.

Low risk, predictable income

Most default superannuation funds will have a proportion of their member’s money invested in government bonds because of their low risk and predictable supply of income.

Like shares, some government and corporate bonds can be traded on the ASX. Government bonds that can be traded on the ASX are known as ‘Exchanged Traded Australian Government Bonds’.

There are two main types of Australian Government Bonds (AGBs) that are listed on the Australian Securities Exchange (ASX):

  • Treasury Bonds: These are medium to long-term debt securities that carry an annual rate of interest fixed over the life of the security. Interest is paid every six months, at a fixed rate, which is a percentage of the original face value of $100. The bonds are repayable at face value on maturity.
  • Treasury Indexed Bonds: These are medium to long-term bonds. The capital value of the bonds is adjusted for movements in the Consumer Price Index (CPI), which measures inflation. Interest is paid quarterly, at a fixed rate, on the adjusted face value. At maturity, investors receive the capital value of the bond - the value adjusted for movement in the CPI over the life of the bond.

The Australian Government has never defaulted on the interest payments on the bonds that it has issued or on the repayment of the principal amount invested in them.

This is why government bonds are considered to be a highly secure investment product, second only to cash at the bottom of the risk spectrum.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.