Bonds can play an important role in investment portfolios, but what exactly are they, what are their benefits, and how do you invest in them?
What are bonds?

Bonds are a type of investment security that enable investors to lend their money to a bond issuer for a set term in return for regular income payments based on a fixed or floating interest rate.

Bond issuers are typically governments, large organisations and companies, which often choose to borrow large amounts of money for different purposes from a pool of investors via the global bond market.

When the term of a bond issue expires the issuer is expected to repay investors their principal investment amount in full.

What are the benefits of bonds?

Bonds are often described as defensive assets. While the capital value of bonds can fluctuate along with changing economic conditions, the issuers’ ability to repay the principal, and interest rates, they are generally less volatile than growth assets like shares and property.

If you hold a bond until the end of its term (maturity), you know how much to expect back at maturity (the face value) and how much you’ll receive along the way (coupon payments).

If you buy or sell bonds before maturity, you are exposed to more volatility as the capital value can fluctuate along with interest rates and market conditions.

Interest rates are one of the primary drivers of bond pricing, with prices typically moving inversely to interest rates. I.e. when interest rates rise bond trading prices fall, and when interest rates fall, bond trading prices rise.

However bonds generally provide more capital stability for medium to long-term investors than shares, which don’t offer an agreed schedule of dividend payments or the full principal repayment at the end of a given term.

As well as providing diversification from shares, property and other assets, investing in a broad range of bonds can also help diversify your returns.

Historically, bond prices have tended to be positive when share prices have been negative. This typical inverse relationship between bonds and shares can provide balance to your investment portfolio.

How do you invest in bonds?

You can buy government and corporate bonds through public offers when they are first issued or on the secondary bond market. High minimum transaction sizes may apply as these markets are considered ‘wholesale markets’.

While some bonds are available to buy and sell on the Australian Securities Exchange with lower transaction minimums, the range can be limited, restricting your ability to build a diversified portfolio.

Managed bond funds and exchange traded funds (ETFs) can be a more flexible, less restrictive way of building a broad portfolio because they are able to purchase more securities that have high transaction minimums due to scale.

The different types of bond funds can give you access to different markets and sectors, providing greater opportunity to diversify your portfolio.

Watch this video with Jean Bauler, Vanguard’s Head of Asia-Pacific Bond Indexing, to learn more about investing in bonds.



Important information and general advice warning

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal Investor and the issuer of the Vanguard® Australian ETFs. We have not taken your objectives, financial situation or needs into account when preparing the above article so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for any relevant Vanguard product, before making any investment decision. Before you make any financial decision regarding Vanguard investment products, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard's financial products can be obtained at free of charge and include a description of who the financial product is appropriate for. You should refer to the relevant TMD before making any investment decisions. You can access our IDPS Guide, PDSs Prospectus and TMD at or by calling 1300 655 101. Vanguard ETFs will only be issued to Authorised Participants. That is, persons who have entered into an Authorised Participant Agreement with Vanguard (“Eligible Investors”). Retail investors can transact in Vanguard ETFs through Vanguard Personal Investor, a stockbroker or financial adviser on the secondary market. Retail investors can only use the Prospectus or PDS for informational purposes. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This article was prepared in good faith and we accept no liability for any errors or omissions.

© 2023 Vanguard Investments Australia Ltd. All rights reserved.

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