Government bonds explained: How they work and how to buy them

Font Size:

When the share market took a hit at the start of the COVID-19 pandemic, it was no surprise to find people looking around for alternatives.

One of the alternatives that has been increasingly popular is government bonds.

Australian government bonds raise money for the government to fund projects and in return offer a guaranteed rate of interest and, after an agreed period, your loan will be paid in full.

According to the Australian Security and Investment Commission’s MoneySmart website, Australian government bonds are the safest type of bonds. This is because if you buy and hold them to maturity you are guaranteed a rate of return.

When you invest in bonds you are lending money to the government. In return, you get regular interest payments, called coupon payments. If you hold the bond until maturity, you get back the face value of the bond.

The face value of a bond is the set value of the bond when it was first issued and is how much you pay for the bond and is also the amount you get back if you hold a bond until maturity.

Why choose bonds?
The coupon payments at regular intervals can provide a stable and predictable income stream and the interest rates that you can earn can be higher than a savings account or term deposit.

Government bonds also have high liquidity, which means they are easy to sell if you need to free up money quickly.

Government bonds are also lower risk than growth investments such as shares or property.

How to buy them
You can buy or sell exchange-traded Australian government bonds (AGBs) at market value in the same way that you buy or sell ASX-listed shares.

The market value may be higher or lower than the face value and you will also have to pay any brokerage fees.

Interest on bonds
The interest on a government bond can be paid at a fixed rate, a floating rate or an indexed rate.

The fixed rate means that the interest rate is set when the bond is issued and it stays the same until maturity.

The floating rate means that the interest rate can go up or down over the term of the bond, in line with the cash rate determined by the Reserve Bank of Australia (for example the floating rate may be set at the cash rate + 2 per cent).

The indexed rate is for those looking to protect against rising inflation. Both the coupon payment and the face value of the bonds increase in line with the consumer price index (CPI).

Selling a bond before maturity
If you buy a bond and hold it to maturity, you’ll get back the face value. But if you sell a bond before maturity, you’ll get market value. This can be more or less than the face value.

The market value of a bond usually depends on market interest rates. That is, the price of fixed rate and indexed bonds moves in the opposite direction to market interest rates. If the market interest rates rise, the price of these bonds falls. If market interest rates fall, the price of government bonds rises.

As with any financial product, you should consider if it is right for your circumstances and seek independent financial advice. 

If you enjoy our content, don’t keep it to yourself. Share our free eNews with your friends and encourage them to sign up.

Join YourLifeChoices today
and get this free eBook!

By joining YourLifeChoices you consent that you have read and agree to our Terms & Conditions and Privacy Policy


Silver lining to low interest rates – if you ask the question

Analyst tells how homeowners can save more than $20,000 in five years.

Have you started your pre-retirement checklist?

Are you approaching retirement? How much planning have you done so far?

Written by Ben


Total Comments: 1



continue reading


The last blockbuster had an end of summer sleepover

Several months ago, the last Blockbuster store on Earth temporarily rebranded - as an extremely nostalgic Airbnb. A few lucky...


Best day trips from Melbourne

We've got more reasons than ever to embrace the adventures we can find in our own backyard and, luckily, Victoria...


Travel SOS: What's the deal with face masks and flying?

Ian has seen reports of people flying without masks and wants to know if it is safe. Q. IanI have...

Mental Health

Frequent travel could make you 7 per cent happier

Every now and then we come across a study that feels as if it's stating the obvious. Such is this...


Travel does at times confront us and make us squirm

Travel does at times confront us and make us squirm, which it should. Travel also can make us appreciate our...


You can now stay in a Buckingham Palace-inspired caravan

Have you ever wondered what Buckingham Palace would look like squeezed into a four-person caravan on the North Yorkshire coast?...


New measures will protect Australians from COVID-19 on all flights

Australia's national cabinet has announced new measures to protect Australians from COVID-19 on domestic and international flights and in airports....


Doctors call for action on social media’s health misinformation

The peak body for Australia's doctors has called on the government to invest in advertising to counter health misinformation being...