Mortgage versus super – a common dilemma
Mortgage versus super – a common dilemma Conventional wisdom used to dictate Australians were better paying off their home loans, and then, once debt free…
Market price
All bonds have a set value when they’re first issued. If you hold the bond until it reaches its end date (maturity), you will receive what you originally invested.
However, if you sell a bond before maturity, you’ll receive the market value of the bond which may be lower than your original investment. Factors like interest rate changes, the risk of the issuer defaulting, how easy it is to sell the bond (liquidity), and how much time is left until the bond matures, all affect its price.
How do investors gain access to bonds?
The primary issuers of bonds in Australia are governments and companies. Investors can gain access to unlisted bonds through several channels, including:
Why invest in bonds?
Bonds can play several key roles in an investment portfolio, providing diversification, stability and income.
Steady income stream: bonds can provide a steady stream of income through regular interest payments paid on a quarterly, half yearly or annual basis. This can be attractive if you’re seeking a reliable source of cash flow.
Diversification: bonds provide a buffer during periods of share market volatility – when share prices are falling, bond prices may not be affected in the same way. Including bonds in your investment portfolio can therefore help to reduce risk.
Capital preservation: Unlike shares, bonds have a fixed maturity date where the issuer repays the principal amount you invested. This can be appealing if you prioritise the return of your initial investment.
Reduced volatility: for retirees or those approaching retirement, bonds can provide a more stable investment option, helping to preserve capital and reduce exposure to the potentially higher volatility of shares.
Protection against rising interest rates: certain types of bonds, like inflation-protected bonds, can provide protection against rising interest rates. This can be valuable in times when interest rates are expected to increase.
What are the risks of investing in bonds?
Just like all kinds of investments, investing in bonds does carry some risks. Here
are some of the most common:
Why are bond prices affected by rising interest rates?
When interest rates go up, the prices of existing bonds typically fall. This happens because higher interest rates make newly issued bonds more attractive with better returns. Existing bonds, offering lower fixed interest rates, become less appealing in comparison.
Additionally, there is an inverse relationship between bond prices and yields (interest rates). Investors demand higher yields when rates rise, leading to a willingness to pay less for existing bonds.
The sensitivity of bond prices to interest rate changes, inflation concerns, and market expectations also contribute to the impact of rising interest rates on bond prices.
Source: MLC
Mortgage versus super – a common dilemma Conventional wisdom used to dictate Australians were better paying off their home loans, and then, once debt free…
Is it worth salary sacrificing into super? Let’s explore the ins and outs of salary sacrificing into your super and help you determine if it’s…
Economic and market overview Australian shares fared well in July, buoyed by suggestions that no further interest rate hikes will be necessary. With inflation coming…