Exchange-traded Australian Government Bonds | My Assignment Tutor

© 2020 ASX Limited ABN 98 008 624 691 | Version 2.0| Dec 2020 Exchange-traded Australian Government Bonds 1/3 Exchange-traded AustralianGovernment BondsProviding investors with security, liquidity and diversification | Version 2.0 – 14 December 2020 Exchange-traded Australian Government Bonds (AGBs) offer stable cash flows and the ability toreduce risk in your portfolio – without locking away your money for the term of the investment.What are Exchange-traded AGBs?Exchange-traded AGBs offer a convenient and accessible way to invest in Australian Government Bonds.AGBs are debt securities issued by the Australian Government. Exchange-traded AGBs enable investors to gainbeneficial ownership of an AGB in the form of a CHESS Depositary Interest (CDI). Holders of Exchange traded AGBsobtain all the economic benefits, including payments, attached to legal ownership of the AGB.AGBs are considered to have the lowest possible credit risk of all debt-based investments being issued by theAustralian Government. AGBs are therefore highly suitable as part of an investment portfolio seeking a secure, stableand reliable cash flow.Due to their low credit risk, Exchange-traded AGBs can also help diversify your portfolio, offsetting the risk of otherinvestments such as shares or property.Types of Exchange-traded AGBsThere are two types of Exchange-traded AGBs:1. Exchange-traded Treasury Bonds (TBs) are medium – to long-term debt securities with a fixed face value. Theycarry the same annual rate of interest over the life of the security, payable every six months.2. Exchange-traded Treasury Indexed Bonds (TIBs) are medium- to long-term debt securities. Their face value isadjusted for movements in the Consumer Price Index (CPI). Interest is paid quarterly, at a fixed rate, on theadjusted capital value. At maturity, investors receive the face value of the security adjusted for CPI movement overthe life of the bond.Why invest in Exchange-traded AGBs? Receive regular, stable payments: AGBs provide investors with a secure income stream through regular couponpayments. In comparison, returns from share investments can fluctuate in line with the profitability of thecompany. Reduce risk through diversification: AGBs may help reduce overall portfolio risk. By combining AGBs and otherinvestments such as shares, you may be able to maximise their return whilst minimising risk. Avoid locking away your money: Exchange-traded AGBs can be sold at any time the ASX bond market is open. Thismeans your money is not locked away as it is with some other interest-earning investments. Hedge against inflation: the face value of TIBs is automatically adjusted for movements in CPI, meaning the valueof your investment is protected from the effects of inflation.Key characteristics Security type: CHESS Depository Interest over Australian Government Bonds. Underlying security: Australian Government Bonds. Face value: TB = $100. TIB = $100 plus CPI adjustment. Coupon: interest paid to the holder, expressed as a fixed percentage of the face value of the AGB. For example, aTB with a face value of $100 might pay a coupon of 6% per annum. This is $6 in interest per year, made up of twohalf-yearly payments of $3.© 2020 ASX Limited ABN 98 008 624 691 | Version 2.0 | Dec 2020 Exchange-traded Australian Government Bonds 2/3 Yield: the return received on an AGB. The yield is based on the price paid for the AGB and the payments (coupons)received if the AGB is held to maturity. Maturity date: the expiry date of the AGB, which sees the face value of the AGB paid to the holder. Market (or gross) price: this is the total amount that an investor pays for an Exchange-traded AGB on the ASXmarket. The purchase price includes two components:1. Capital price: the price of the AGB as estimated by the market based on a number of variables including interestrate and maturity date.2. Accrued interest: the amount of interest accumulated on the AGB since the last coupon payment. Because interestis paid at regular intervals, the AGB price includes a daily accrual of interest owed. The market price should fallimmediately when the AGB goes ‘ex-interest’.Buying or selling on ASXYou can buy or sell Exchange-traded AGBs on ASX the same way you buy or sell shares. Trades are cleared by ASXClear and settled through CHESS.You should always be able to buy or sell Exchange-traded AGBs because they are based on one of the deepest andmost liquid bond markets in Australia. This means there is typically a high level of stock availability and liquidity.Additionally, liquidity is supplemented by ASX-appointed market makers who source prices from the wholesale bondmarket.Case study – buying exchange-traded Treasury BondsOn 26 May 2009, an investor purchases 1,000 Exchange-traded TBs with the following characteristics: CharacteristicsDetailsCoupon6%Coupon frequencySix-monthly, paid on 15 February and 15 AugustMaturity date15 February 2017Face value$100 The market price at the time of purchase is $108.172, making the total purchase cost $108,172 (excluding brokerageand fees). The market purchase price includes accrued interest of $1,657. The price represents a yield to maturity of4.97% per annum.Income streamA coupon of 6% per annum is paid twice per year. The income stream is calculated as follows: (number of Exchange-traded TBs x face value) x (coupon rate/coupon frequency)= (1,000 x $100) x (0.06/2)= $3,000 every sixmonths The investor will receive a payment of $3,000 twice per year until the Exchange-traded TB matures.© 2020 ASX Limited ABN 98 008 624 691 | Version 2.0 | Dec 2020 Exchange-traded Australian Government Bonds 3/3Payment at maturityAt maturity, the investor will receive the Exchange-traded TBs’ face value and the final coupon. This is calculated asfollows: [(number of Exchange-traded TBs x face value) x (coupon rate/coupon frequency)] + (number of bonds x facevalue) = [(1,000 x $100) x (0.06/2)] + (1,000 x $100)= $3,000 + $100,000= $103,000 SummaryThe investor paid $108,172 for 1,000 Exchange-traded TBs, which were held till maturity in 2017. During the life of theTB, the investor would receive $30,000 in coupon payments and the TB’s face value (totalling $100,000) at maturity.The return on the original investment is 4.97% pa.Note that the yield (4.97%) is lower than the coupon (6%). This is because the purchase price ($108,172) was higherthan the TB’s maturity value ($100,000).About the exampleThis example uses illustrative rates and figures to demonstrate one particular scenario. You should use rates andfigures applicable at the time to assess the merits of any transaction you may enter into.This case study does not take into account any losses or gains to the value of an AGB as a result of changing marketconditions or interest rates.RisksLike any investment, Exchange-traded TBs carry risks that you must understand before investing. In this example, ifthe price of the TB falls due to rising interest rates, you would suffer a capital loss if you chose to sell the TB before itmatured.You should obtain independent advice from a professional adviser before making any financial decision.For more information Consult your adviser or broker. Review the investor information statement produced by the Australian Government. Go to for more information from the Australian Government. Visit for investor education, product details, research, performance figures, news and prices. Contact ASX customer service on 131 279 or is provided for educational purposes and does not constitute financial product advice. You should obtain independent advice from an Australian financialservices licensee before making any financial decisions. Although ASX Limited (ABN 98 008 624 691) and its related bodies corporate (ASX) have made every effort toensure the accuracy of the information as at the date of publication, ASX does not give any warranty or representation as to the accuracy, reliability or completeness ofthe information. To the extent permitted by law, ASX and its employees, officers and contractors shall not be liable for any loss or damage arising in any way (includingby way of negligence) from or in connection with any information provided or omitted or from anyone acting or refraining to act in reliance on this information.© Copyright 2020 ASX Limited ABN 98 008 624 691. All rights reserved 2020.Information Line: 131 279 these products the market is operated by ASX Limited ACN 008 624 691


Leave a Reply

Your email address will not be published. Required fields are marked *