What types of bonds are there?
There are a wide variety of different types of bonds that you can invest in, below we have listed some of the most common:
Fixed Rate Bonds: The Victorian Government Green Bond is an example of a fixed rate bond, because the interest rate it pays (1.75%) is fixed at the date of issue and will not move. Fixed rate bonds expose you to the risk that interest rates will rise.
Floating Rate Bonds: Floating rate bonds are bonds where the interest rate moves, usually in line with the cash rate. For example, the Victorian Government could have issued their green bond as paying a floating rate of the cash rate. This means that the interest rate will increase any time the cash rate increases, and vice versa. Floating rate notes are a good investment if you think that interest rates will be increasing soon.
Inflation Linked: It is also possible to purchase inflation linked bonds. These bonds either pay a return that is linked to inflation. The Consumer Price Index is the most common way that inflation is measured.
So, for example the bond may pay interest at a rate of the Consumer Price Index+0.25%. Alternatively the principal amount of the bond may adjust for inflation .
Inflation-linked bonds are helpful for people on a fixed income, for example those in retirement, who need to ensure that their interest payments are at least keeping pace with inflation.
Investment Grade: Investment grade bonds are those with a credit rating of BBB- or above. Investment grade bonds are lower risk than non-investment grade bonds.
Junk Bonds: Non-investment grade bonds (i.e. bonds rated less than BBB-) are also known as junk bonds. They are higher risk than investment grade bonds. If you decide to purchase junk bonds, make sure that you are being compensated for the higher risk by being paid a higher return, and that you are happy with the credit quality of the bond issuer.
The information on this website is for general information purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified financial or investment adviser. No material contained within this website should be construed or relied upon as providing recommendations in relation to any financial product. Balance Impact does not recommend or endorse products and does not receive remuneration based upon investment or other decisions by our email recipients, publications, newsletter or website users.