Govt. Bonds listing on the ASX today

[clowboy]

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

 

[Vixs]

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.

 

[DJG]

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.

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.

 

[sydboy007]

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.

 

[Julia]

Re: GOVT Bonds listing on the ASX today

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.

 

[McLovin]

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!

 

[DJG]

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.

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!

 

[ROE]

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 .....

 

[McLovin]

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?

 

[Huskar]

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 )

 

[chops_a_must]

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.

 

[DJG]

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

 

[Zedd]

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?

 

[McLovin]

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.

 

[clowboy]

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?

 

[McLovin]

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.

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.

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

Haven't heard that. Got a link?

 

[clowboy]

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?

 

[clowboy]

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.

 

[McLovin]

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?

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.

 

[McLovin]

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.