Within the Australian market, there are several options for investing in bonds.
If you wish to purchase bonds wholesale, you will be required to hire a broker to execute your trades on your behalf. However, this typically is in exchange for a fee. This is due to the fact that the majority of bonds are offered “over the counter” and are not publicly traded. The minimum investment for buying bonds wholesale is sometimes quite high – often in the range of $500,000 and above.
In the case of most Australian investors that don’t have a spare $500,000 laying around, another option is to purchase exchange-traded Australian Government bonds. These bonds are traded on the ASX and operate similarly to ETFs. However, instead of following an index, their returns try to mimic a particular bond. By acquiring units in the Australian Government Treasury Bond, for instance, you may have exposure to Australian Government bonds paying 3% interest and due in March 2047.
There is also a large variety of exchange-traded corporate bonds available for companies like Westpac Banking and Telstra Corporation Ltd. Exchange-traded corporate bonds are relatively new products, having only launched in the Australian market in 2015. Therefore, the range of bonds available to invest in is still quite limited.
How to profit from bonds
There are two ways for one to profit from investing in bonds. The first way is to purchase and hold the bonds until they mature whilst collecting the coupon payments along the way. This means that by the time the bond matures, the initial investment amount would have been received back, and your profit will be whatever interest you gained during the loan period.
The second way to make money from bonds is to sell them for a higher price than you paid initially. For example, if a 10-year bond was purchased for $5000, in a year’s time, the price of that bond may have increased to $6000. That means you can sell that bond for a $1000 profit.