Australian Bond Exchange

Its quite endemic that bonds aren’t more well-known in Australia. A lot of that is intentional from the wholesale market. Trying to confuse the retail investors with lots of numbers, formulas and jargon.This article will go through some of the terminology of bonds and clear things up a bit.

Face Value /
The notional amount of the loan and represents the amount that will be repaid at maturity
Coupon The interest rate that the bond earns expressed in per annum
Par Value Similar to face value but in terms of price. ie par $100 per $100 face value
Maturity The date the bond matures. Unlike shares, bonds have a specified date you receive your capital back
Capital Price The current market price of the bond per $100 face value. It can be trading below par (discount) or above par (premium)
Yield to Maturity (YTM) This is your return per annum if you hold the bond to maturity
Accrued Interest Interest on the bond is calculated daily. Each day that goes past the bond accrues that interest to be paid the next coupon date. This can be roughly calculated by the coupon divided 365 for 1 days interest

A Corporate Bond Example

Let’s go through an bond example. Don’t worry, I’ll pull it all apart for you after:

You buy $25,000 of “Centuria 7% 21/4/21″ at 105 on 21st of May 2018 giving a Yield of 5.50% costing $26,250.

$25,000: This is the Face Value. This is what you will receive at bond maturity
7%: This is the Coupon rate per annum (paid as 3.5% every 6 months)
21/4/21: This is the Maturity date 21st of April 2021 (3 year bond)
105: This is the capital price, where you pay $105 per $100 face value
5.50%: This is the Yield To Maturity.  This means your investment return is 5.50%pa when held to maturity.
$26,250: This is the price paid for the bond, without the accrued interest. Meaning to buy 25,000 face value of the bond you’re investing $26,250 for your bonds.

Accrued Interest: Not shown in the example, but will be on your invoice. Since you bought the bond in May, one month after it paid a coupon in April, the daily interest accrued is worth $143.50. You will be paid the full coupon amount (including this $143.50) the next coupon.

Paying a Premium

You may notice that you are paying a premium to own these bonds (Capital price of $105, vs the payout of Par $100). This premium is well compensated by the much higher Coupon rate of 7% and will average out so you’re return on investment is equal to the YTM of 5.50%.

Over the term of your investment, you get paid 7% ($7 per $100 Face Value) per year. But because you pay more than $100 Face Value, that reduces your overall return to 5.5%.

Please see this article more on bonds at a discount and premiums.

Using the right thinking of Yield to Maturity and Coupon you can tune your investments to return a good regular income and at the same time know your overall returns.

Call through to your advisors now to test your bond terminology.