# Govt. Bonds listing on the ASX today



## clowboy (21 May 2013)

So, Bonds are about to start trading as etf's on the ASX from today, am interested what this might mean and for some general insight into bonds.

Here is the link to the codes and bond details.

http://australiangovernmentbonds.gov.au/etbs/list-of-etbs/

The interest rates seem to vary quite widely, even with similar expiry dates, is this the quality of the bond?

Am I right in that upon expiry the Govt will pay $100 per bond, so if in effect the bond is trading at $110 at expiry you lose $10 per bond?  Conversly if it's trading at $90 you make $10?

As best as I understand it if RBA rates drop the face value of the bond will rise and if RBA rates rise the face value will decrease, so currently, over the longer term, one could argue there is greater downside risk than upside?

How would people compare the risk of a Govt bond Versus a Bank deposit in terms of risk / loss of capital? 

Cheers


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## Vixs (21 May 2013)

*Re: GOVT Bonds listing on the ASX today*

The link you provided has a link at the bottom that looks like it will help you understand why bonds are priced the way they are.

It's about yield-to-maturity and whether or not that trumps paying a premium and losing some face value or buying below face value and getting some of the yield at the back end when it matures.


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## DJG (21 May 2013)

*Re: GOVT Bonds listing on the ASX today*



Vixs said:


> The link you provided has a link at the bottom that looks like it will help you understand why bonds are priced the way they are.
> 
> It's about yield-to-maturity and whether or not that trumps paying a premium and losing some face value or buying below face value and getting some of the yield at the back end when it matures.




In addition to this, original principal + interest is paid back upon maturity. ie - $100 + $10 worth of coupons (that's an example)
If you were to sell prior to maturity you could get face value of what it is sold at + any coupons (if any) that you got.  

Once I get on a computer I can go a bit more in depth to the pricing, and evaluating of bonds but for now, they're [gov't bonds] the closest thing you'll find (highly regarded as) to risk free profit (in a developed country anyway).

Some decent coupon payment %'s there also, along with a liquid market if you needed the cash.
Biggest problem will be the broker's charging massive fee's like usual.


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## sydboy007 (21 May 2013)

Now to hope the large corporates start to list some decent yielding bonds.

Considering how the rating agencies are being a lot harsher on hybrids and how they treat them as debt rather than equity, i'm hoping that the more vanilla style bond will come back in vogue.

start offering 3%+ over 6 month BBSW to the punters and I think you'll have a lot of interest.


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## Julia (21 May 2013)

*Re: GOVT Bonds listing on the ASX today*



DJG said:


> Once I get on a computer I can go a bit more in depth to the pricing, and evaluating of bonds but for now, they're [gov't bonds] the closest thing you'll find (highly regarded as) to risk free profit (in a developed country anyway).



That would be much appreciated, DJG.  I've never used bonds.


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## McLovin (21 May 2013)

The average punter is better served putting their money in the bank than in government bonds. The banks have a government guarantee anyway, so why take the inferior interest rate.

Agree with Syd, re corporate bonds. People would be eating up Sydney Airport linkers if they knew they existed!


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## DJG (21 May 2013)

McLovin said:


> The average punter is better served putting their money in the bank than in government bonds. The banks have a government guarantee anyway, so why take the inferior interest rate.
> 
> Agree with Syd, re corporate bonds. People would be eating up Sydney Airport linkers if they knew they existed!




Do you mean term deposits or some other form of bank investment? excluding shares of course as the risk factor isn't even in the same ball park.
I know there is a few term deposits out there offering 4-5+%, but usually as an introductory offer.



Julia said:


> That would be much appreciated, DJG.  I've never used bonds.




I'm sure many will have different opinions to the information I provide, but this is what I've learnt from Uni anyway.

*Key Features of a Bond:*
- required rate of return
- coupon rate
- face value (also known as 'par' value)
- the price (or intrinsic value)

*Required Rate of Return v. Coupon Rate*
- RRR is a function of 1) _prevailing level of interests rates_ and 2) _risk of the security_ - in this case, the Australian Treasury Bond.

The coupon rate:
- is the annual rate of interest paid by the bond issuer (AUS Gov't) to the bond holder (you)
- This rate is established before the debt is issued and rarely (I mean, basically never) changes throughout the life of the bond.
- You can multiply the coupon rate by the face value to determine the annual amount of interest paid.
- You can divide the coupon rate by number of payments per year to determine the size of each coupon payment. (In the case of the Aus Gov't Treasury Bonds - usually semi-annual, so 2 payments per year). - Think of it like dividends.

*Face Value v. Price*
- The face value is the amount that will be repaid upon maturity of the bond - the face value never changes over the life of a bond
- _the price is the present value of the future cash flows (coupon payments + face value principle), discounted at the required rate of return._

*Changes in RRR & Price*
_inverse relationships between the RRR and the price_

1) - If RRR < Coupon Rate, then Price > Face Value..therefore trading at a *premium*
2) - If RRR > Coupon Rate, then Price < Face Value..therefore trading at a _*discount*_
3) - If RRR = Coupon Rate, then Price = Face Value..therefore trading at _*par*_

*Explanation of 1):* Since the RRR is < Coupon Rate, investors are willing to pay more for the bond -eg -You want 5% a year, you're offered 7% for the exact same risk..you'll always take the 7% any day of the week. 
*Explanation of 2):* Since the RRR is > Coupon Rate, investors find the bond less attractive as they aren't getting what they require. - eg - You require 5% return, the bank offers you 4% and that's final.
*Explanation of 3):* - Since the RRR is = Coupon Rate, investors will be satisfied that the coupon rate is a fair return, therefore price = face value.

_I won't bother talking about zero coupon bonds, ie - you only get the principle/face value at the end. - unless you want to hear about it._

*Coupon Payments*
As I may of mentioned above, to figure out the coupon payments, calculate as follows:




CPN = the periodic coupon payment

*POP QUIZ: A 15% coupon bond has a face value of $1000. - What is the coupon payment if coupons are paid (a) annually, (b) semi-annually, (c) quarterly, (d) monthly* - Be good if only the original poster or those wanting to learn bonds answers the quiz.
(a) =
(b) =
(c) =
(d) =

*Valuation of a Coupon Bond*
As mentioned, its based on calculating the present value of all future cash flows (*What are they again?*)




CPN = the interest payments/periodic coupon payment
FV = face value of the bond
y = yield or RRR
n = remaining life of the bond

*EXAMPLE: Issued on the 12 March 2008, carrying 9% p.a payable quarterly, face value of $100 and maturing in December 2010. Consisting of a yield of 8.05%p.a, what is the value of the bond?*
*Step 1 - Calculate Coupon Payments*
Coupon Rate x Face Value/4
0.09 x $100/4 = $2.25 per quarter

There are 11 quarterly payments to be made in the remaining life of the bond

Annual yield = 8.05%, so the quarterly yield = 2.013% (rounded up) - (8.05/4 = 2.013..precisely 2.0125)

*Step 2 - Using the formula and input the corresponding numbers*







2.25 came from the coupons
.02013 came from the quarterly yield (can always just do 1.02013 rather than the '+' symbol)
11 came from the amount of payments remaining in the life of the bond (it's a small 11 because its '*to the power of'* - it can be represented/input to a calculator by '^'
100 came from the face value.

The brackets enclosing the centre part of the formula are meant to engulf the whole middle sum (didn't know how to do it).
ie - the 1-1/(1.02013)^11 part.

*Yield to Maturity of a Coupon Bond*
You can calculate this if you know the price, coupon rate, face value and number of periods. I wasn't required to do this though.
Here's an online calculator for it though if you're interested: http://www.investopedia.com/calculator/aoytm.aspx
As someone mentioned, yield to maturity is quite important.
Here is a link, the first two or three pictures summarise the interest rate/bond price correlation.
http://www.schwab.com/public/schwab...ct_of_interest_rates_on_bond_investments.html

You can change the RRR to the interest rate, as mentioned above with the 'trading at premium, discount or par' section. ie - you'd be willing to pay more for a bond that is returning 5% if the interest rates are only 4%. On the flip side, you would pay less for a bond that is offering 4% and the interest rates are 6%.
By trading in this manner, you're also capable of profiting/losing money from capital gains.

ie - the current bonds will become a lot more attractive if the RBA keeps dropping interest rates and thus the bond price will increase.

_*Anyway, I hope this helped a bit, by all means I'm not expert in regard to this and have never actually traded a bond in my life. I do enjoy the fundamentals behind it all though. - I'm sure a few people will provide more and accurate insight to what I've discussed.*_

Enjoy!


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## ROE (21 May 2013)

Government bonds is not a sure bet ...its value move with rates...
Rate up bond value down
Rate down bond value up.

You less likely to worry about Australian government not meeting their obligation to pay interest
But with a bit of knowledge and risk you can do hell a lot better in stocks and hybrid....

Bond not my cup of tea while I accumulate wealth .....


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## McLovin (21 May 2013)

DJG said:


> Do you mean term deposits or some other form of bank investment? excluding shares of course as the risk factor isn't even in the same ball park.
> I know there is a few term deposits out there offering 4-5+%, but usually as an introductory offer.




Term deposits, even at call deposits. You can get at least 4% at a bank for a TD. Significantly more than the 2.50% that 2 year government bonds are paying and without market risk.

There's some decent corporate debt around (the aforementioned Sydney Airport LINKERS), but government debt, not really interesting.

Is it only CGS's at the moment or are they also making state debt available?


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## Huskar (21 May 2013)

This is a very very important development for Aussie retail investors (and even the financial system) in my honest opinion.

The mind boggles that govt bonds have not been more easily accessible sooner.

Of course they do not have same return potential as equities - they are a different component in the risk spectrum. But just because they are "boring" does not mean you cannot do lots of interesting things with them.

For example Grahamites will allocate 60/40 to equities/govt bonds and generally do much better with less volatility than 100% either one.

Or Taleb devotees might go 80-90% govt bonds and 10-20% deep out of the money options.

Hats off to Swan/Gillard on this initiative (doesn't happen often so gotta note it when deserved )


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## chops_a_must (21 May 2013)

Mike Smith the other week said new regulations or some such would open up corporate bonds to the public.

These will work really well in super funds for people.

Government bonds are also good for putting option premiums as well.


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## DJG (21 May 2013)

I could whip up a quick bond valuation speadsheet if anyone cares?...


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## Zedd (21 May 2013)

I understand most of the ins and outs of bonds but have never thought to ask how the issuer determines/decides on the coupon rate. In this case how does the Government decide what is a valid coupon rate? Is it based on what seems to be investor preference in the market at time of auction?


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## McLovin (22 May 2013)

Huskar said:


> This is a very very important development for Aussie retail investors (and even the financial system) in my honest opinion.
> 
> The mind boggles that govt bonds have not been more easily accessible sooner.




Playing Devil's advocate for a moment, for the decade up to 2007 government debt was shrinking fast. I remember in the late 90's there was discussion about whether or not to completely shut the government bond market, sensibly that wasn't done as the suggestion even then seemed myopic. That's probably why access to the bond market was never modernised, there was no need for it. Even in 2006 there was only around $55b in AUD denominated government debt. Which is really a drop in the ocean, when compared to bank deposits.

Don't forget as well that until the big public floats starting in the 1990's the stock market was pretty much a rich man's pursuit in Australia, so investing outside of property and bank deposits is still a relative new phenomenon in Australia.


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## clowboy (22 May 2013)

McLovin said:


> The average punter is better served putting their money in the bank than in government bonds. The banks have a government guarantee anyway, so why take the inferior interest rate.
> 
> Agree with Syd, re corporate bonds. People would be eating up Sydney Airport linkers if they knew they existed!




As I understood it, the interest rates on bonds are higher than term deposits, especially over the longer term.

As for the Govt Garuntee, how is it any different to a bond, surely if the Govt was defaulting on their bonds they would not be in a position to uphold the garuntee.  Also, I thought I read somewhere that that was coming to an end?


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## McLovin (22 May 2013)

clowboy said:


> As I understood it, the interest rates on bonds are higher than term deposits, especially over the longer term.




How do you figure that? Here's the current yield on Australian sovereigns...

http://www.bloomberg.com/markets/rates-bonds/government-bonds/australia/

I'm pretty sure you can find a term deposit that beats those.



=clowboy said:


> As for the Govt Garuntee, how is it any different to a bond, surely if the Govt was defaulting on their bonds they would not be in a position to uphold the garuntee.




Correct, so logically, you take the higher yielding option ie bank deposits.



clowboy said:


> Also, I thought I read somewhere that that was coming to an end?




Haven't heard that. Got a link?


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## clowboy (22 May 2013)

So, just as an example I use the first Bond that has been listed

GSBW13

Correct me if I am wrong but isnt this paying ~5.5%

The coupon rate is 5.5, the original (and redeemable) amount is $100 and it's trading at ~104 with roughly $2 of Owed interest, puts it's current yield at ~5%, more than you could get on a term deposit.

I realise it is almost at expiry, but am I missing anything else?


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## clowboy (22 May 2013)

McLovin said:


> Haven't heard that. Got a link?




No, I have a vague feeling I read about it in some budget info, but to be honest I could honestly be imagining it, I don't really care too much for the Govt garuntee anyway, if it ever came into effect then the govt would basically be proping up a failed system + we would have bigger things to worry about I think.

Thanks for that link for the yields. they seem lower than what the ASX link is suggesting, and I would still argue you can't find 3.5% for 15 years with a bank, particuarilly on a low $$ amount (in theory you could invest as little as $100 on the asx bonds, but in reality you would want $5,000 and up I guess.


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## McLovin (22 May 2013)

clowboy said:


> So, just as an example I use the first Bond that has been listed
> 
> GSBW13
> 
> ...




The YTM is 2.084%. You pay ~$104.327 today, you will receive 2 coupons of $2.75 between now and December + the face value ($100) at maturity. 

Without getting into the specific YTM calculation (there's plenty of online calcs that will do it for you):

-$104.327
+$  2.75
+$  2.75
+$100.00

=$1.17 on an investment of $104 over a shade over 7 months. [$1.17/(7/12)]/$104 = 2% (this is a rough calculation and not accurate but it does show that the bond is nowhere near yielding 5%)

If that were the case the the yield curve would be completely out of whack: A bond maturing in 7 months having a higher yield than a 15 year bond.


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## McLovin (22 May 2013)

clowboy said:


> Thanks for that link for the yields. they seem lower than what the ASX link is suggesting, and I would still argue you can't find 3.5% for 15 years with a bank, particuarilly on a low $$ amount (in theory you could invest as little as $100 on the asx bonds, but in reality you would want $5,000 and up I guess.




The ASX has the correct yield 2.084% on the page you lifted the price of the bond from.


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## clowboy (22 May 2013)

Ok, it's night time here and tired from 12 hours of doing tax returns so brain is a little whacky but I follow what you are saying and it makes sense, thanks for clarifying.

A yield of 2% is indeed sucky.

thanks


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## Huskar (22 May 2013)

McLovin said:


> Playing Devil's advocate for a moment, for the decade up to 2007 government debt was shrinking fast. I remember in the late 90's there was discussion about whether or not to completely shut the government bond market, sensibly that wasn't done as the suggestion even then seemed myopic. That's probably why access to the bond market was never modernised, there was no need for it. Even in 2006 there was only around $55b in AUD denominated government debt. Which is really a drop in the ocean, when compared to bank deposits.
> 
> Don't forget as well that until the big public floats starting in the 1990's the stock market was pretty much a rich man's pursuit in Australia, so investing outside of property and bank deposits is still a relative new phenomenon in Australia.




Spot on.

For what it's worth my opinion is that the govt should be loading up on debt with such unheard of low bond yields...


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## DJG (22 May 2013)

Is there any reason you guys who are in favour of a TD over the gov't bonds aren't looking towards the Exchange-traded Treasury Bonds (TBs)? - Which is what the OP is about.

Which is about 5% coupon rate on average

I can't see a TD beating that without the disadvantages of locking in your money. Where as the TB's you can buy/sell in case of an emergency, better return elsewhere etc.

ie - http://www.asx.com.au/products/list-of-agbs.htm

EDIT: - Here's a full sheet with the yields, yeap the yield isn't all that much to die for.

http://www.asx.com.au/asx/markets/interestRateSecurityPrices.do?type=GOVERNMENT_BOND


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## McLovin (22 May 2013)

DJG said:


> Is there any reason you guys who are against the gov't bonds wouldn't look towards the new Gov't Treasury Bonds which going by the ASX are 4-6+%....which is what the OP is about?
> I can't see a TD beating that, also having to lock your money in but with the treasury bonds it's a liquid market...




You're confusing the coupon with the yield.

5% coupon bond at $100 price pays $5 interest. At $200 it still pays $5 coupon, but the yield has halved to 2.5%.


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## DJG (22 May 2013)

McLovin said:


> You're confusing the coupon with the yield.
> 
> 5% coupon bond at $100 price pays $5 interest. At $200 it still pays $5 coupon, but the yield has halved to 2.5%.




Thanks mate, just edited the post..

EDIT: - Here's a full sheet with the yields, yeap the yield isn't all that much to die for.

http://www.asx.com.au/asx/markets/interestRateSecurityPrices.do?type=GOVERNMENT_BOND


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## Zedd (22 May 2013)

Zedd said:


> I understand most of the ins and outs of bonds but have never thought to ask how the issuer determines/decides on the coupon rate. In this case how does the Government decide what is a valid coupon rate? Is it based on what seems to be investor preference in the market at time of auction?




Anyone? I've looked around the web and can't get a satisfactory answer...


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## McLovin (22 May 2013)

Zedd said:


> Anyone? I've looked around the web and can't get a satisfactory answer...




It's by tender...

http://www.aofm.gov.au/content/borrowing/tender.asp?NavID=31


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## Zedd (22 May 2013)

McLovin said:


> It's by tender...
> 
> http://www.aofm.gov.au/content/borrowing/tender.asp?NavID=31




Initial bond price is determined via tender. Coupon rate is detailed prior to tender unless I've misunderstood. Any other thoughts?


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## McLovin (22 May 2013)

Zedd said:


> Initial bond price is determined via tender. Coupon rate is detailed prior to tender unless I've misunderstood. Any other thoughts?




Yep, my understanding is the tender bid is submitted as YTM, not price. Which makes sense for a negative art like bond investing.


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## Sir Osisofliver (6 June 2013)

*AGB's (Australian Government Bonds) - now you can trade them through the ASX*

Just recently the ASX has stared offering AGB's as an exchange traded instrument. ASX has produced some educational material on them...you can access here

I've got some thoughts on this I would like to share, but I'd like to get the opinions of the people on here.

What do we think of this? Is this something that would form part of your long-term investment modelling or would you be looking at it as an instrument you could make short-term gains out of?

Lets get some discussion going.

Cheers

Sir O


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## Julia (6 June 2013)

*Re: AGB's (Australian Government Bonds) - now you can trade them through the ASX*

For me it would depend on the interest rate.


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## kid hustlr (6 June 2013)

*Re: AGB's (Australian Government Bonds) - now you can trade them through the ASX*



Sir Osisofliver said:


> Just recently the ASX has stared offering AGB's as an exchange traded instrument. ASX has produced some educational material on them...you can access here
> 
> I've got some thoughts on this I would like to share, but I'd like to get the opinions of the people on here.
> 
> ...




One of the guys in the office had a quick look at these and he seemed to think they were (relatively) quite expensive to trade. As such I would think it would make them difficult to trade on a short term basis.

As a retail punter you can always get a better interest rate in a term deposit/high interest account so the only real reason to include these bonds in your portfolio would be to speculate for a cap gain purpose. Easier said than done in my opinion.


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## McLovin (6 June 2013)

*Re: AGB's (Australian Government Bonds) - now you can trade them through the ASX*

Thread here already...

https://www.aussiestockforums.com/forums/showthread.php?t=26796


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## Joe Blow (6 June 2013)

As these bonds are ASX listed, I have decided to move this thread to the *ASX Stock Chat* forum.


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## Sir Osisofliver (6 June 2013)

ok thanks for the Merge Joe.

I've just read through here.  Most don't seem to understand how this works in terms of the big picture. I went through the ASX online course and frankly was a bit pissed off with the tutorial.  On the very first page of the online course they have three little boxes, which you move into position, entitled "Regular income", "Tradeable" and *"capital security"*. Adult learning principles ASX! You know the FIRST and LAST thing that people read is what they remember.

Yet there's some print on the page about "The market price of AGB's may rise or fall presenting the potential for profits or * losses*".

Capital security =/= losses

I can imagine here the sales job that cowboys are going to do in the product. _"Look capital security is an integral part of the product, it's the risk free rate of return after all in economic theory and we need to diversify your portfolio into other asset classes, just sign here."_

It's been mentioned here what that mechanism is that can fluctuate the capital value of the bond.  The movement of interest rates.   Where are interest rates right now may I ask in terms of the big picture?  Are they presently extremely high? (which means a falling interest rate environment and an increase in the capital value of the bond?)  Why no, I think that they are at the lowest level we have ever seen. Hmm so over the longer term, as our economy improves and the Reserve Bank starts to put interest rates up, what do you think will happen to the capital value of the bond? Correct the capital value will *fall*.

But But it's a capital security product. Absolutely! Your FACE VALUE didn't change at all. You did say that income was important to you right? (pity that the impact of inflation and taxation over a long holding period meant your real rate of return was a negative number, but you know - couldn't predict the movement of interest rates, it's a non-diversifiable risk after all - bit of a black swan event you know - but that was all in the fine print and you signed). 


*NOT ADVICE. DYOR - Not Kidding.* 

Personally the time for bonds IMO is *over* until the next cycle for a long-term asset. It would be value destroying to consider a bond approach at this point in the economic cycle. Trade it all you want. Long-term hold? No thanks.

I await the next Storm Financial to take advantage of the lack of consumers knowledge. 

Cheers

Sir O


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## McLovin (6 June 2013)

Sir Osisofliver said:


> I can imagine here the sales job that cowboys are going to do in the product. _"Look capital security is an integral part of the product, it's the risk free rate of return after all in economic theory and we need to diversify your portfolio into other asset classes, just sign here."_
> 
> It's been mentioned here what that mechanism is that can fluctuate the capital value of the bond.  The movement of interest rates.   Where are interest rates right now may I ask in terms of the big picture?  Are they presently extremely high? (which means a falling interest rate environment and an increase in the capital value of the bond?)  Why no, I think that they are at the lowest level we have ever seen. Hmm so over the longer term, as our economy improves and the Reserve Bank starts to put interest rates up, what do you think will happen to the capital value of the bond? Correct the capital value will *fall*.
> 
> But But it's a capital security product. Absolutely! Your FACE VALUE didn't change at all. You did say that income was important to you right? (pity that the impact of inflation and taxation over a long holding period meant your real rate of return was a negative number, but you know - couldn't predict the movement of interest rates, it's a non-diversifiable risk after all - bit of a black swan event you know - but that was all in the fine print and you signed).




Indexed CGS's are also now available, fwiw.


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## Sir Osisofliver (7 June 2013)

McLovin said:


> Indexed CGS's are also now available, fwiw.




Oh yes I'm aware of that, but once again that applies indexing (the effect of inflation) to the face value of the bond, not the capital value of the bond.

With any instrument that has the potential to make profits or losses, (IE the fluctuation in the capital value) *timing* becomes critical if the investment is not to be value destroying.

Cheers

Sir O


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## McLovin (7 June 2013)

Sir Osisofliver said:


> Oh yes I'm aware of that, but once again that applies indexing (the effect of inflation) to the face value of the bond, not the capital value of the bond.
> 
> With any instrument that has the potential to make profits or losses, (IE the fluctuation in the capital value) *timing* becomes critical if the investment is not to be value destroying.
> 
> ...




Fair point. I doubt many current FA's would know the first thing about bond duration and its affect on volatility. Which isn't their fault, it's unlikely they've had to construct a bond portfolio.


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