BUSM4160: A Critical Analysis of Government Bonds as Safe Investments

This report examines whether government bonds are a safe investment, particularly for general and large company investors, within the Australian context. It discusses the role of the Australian Securities and Investments Commission (ASIC) and the nature of government bonds, including their fixed interest rates and maturity dates. The report explores the benefits of investing in commonwealth exchange-traded bonds, such as diversification, low cost, risk management, and reinvestment opportunities. Ultimately, the report concludes that government bonds are a secure investment strategy, offering investors good returns upon maturity, making them a safer alternative to equity shares.

Running head : MANAGERIAL FINANCE

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Executive summary:

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Introduction:
The study deals with the discussion on whether the government bond are a safe
investment for the general as well as the big company investors. Apart from that the study
also discusses the roles and responsibilities of the Australian government regarding this
concept as well as a suitable solution regarding the statement.
Discussion:
Whether the government bonds are safe investment:
Australian security and investment commission is an organization which deals on
Australian corporate regulation. The role of the corporate body is to ensure financial service
laws to protect the Australian consumers, investors and creditors. However the Australian
government bond are secured products of which the benchmark is set as per the market
standards (Lu and Sun, 2013). However the government binds provide agreed interest rate
over the agreed capital value of the firm. Hence the government pays interest on maturity
(Graham ,Leary, and Roberts, 2014). The study focuses on the discussion about whether the
government bonds are the safe investment for the investors or not and whether the investors
are having good amount of return on the date of maturity of the bond value. The bond issued
by the commonwealth of Australia is known as the commonwealth government securities.
These investments provide the investors with a predictable cash flow on a periodic basis with
a specified maturity date. These are the treasury bods with a fixed rate value that carry the
same annual rate of interest over the security which is payable by 6 months. However the
face value of the exchange traded securities are adjusted regarding the movement of the
consumer price index (CPI). By this value the interest rate received will be varying from the
one quarter to the next one. These government bonds are purchased and sold via exchange
trading through the hands of the financial advisor, stockbroker and online trading account.

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However there are some benefits are added with the purchase of the commonwealth exchange
traded bonds which are as follows-
Diversification: Global investment grade fixed assets plays an important role in the market in
constructing the investment portfolio to diversify the risker equity investment. The exchange
traded binds are simple and easy to use. Hence the investors have diversified options based
on the bond portfolio and it can increase the credit quality and term structure (Ciner,
Gurdgiev and Lucey, 2013).
Low cost: The bond ETF tends to have greater economies of scale than the individual bond
portfolio created the fund manager of the respective company. Therefore the execution cost
of the same gets low. Apart from that the ETF are useful for the investor who have great
bargaining power than the small trading investors. Hence the pricing strategy of the
investment get favourable to the investor.
Risk management: Bond ETF provide consistent risk than the normal bonds. Since high risk
tends to high return therefore the chance of getting the return on investment in high over the
bonds by the rational investor.
Reinvestment of capital: Since in bond investment the return is high, therefore the investor
can reinvestment the money acquired after maturity. Hence there is a chance of timely
investment and periodic income cash flow (Agyei-Ampomah ,Gounopoulos and Mazouz,
2014.).
Hence it is the reason the investor can look to invest in government bonds than in
equity share because these are highly securitized and provides good amount of return by the
end of maturity period. Hence it is a safe investment for the investors.

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Conclusion:
Hence a conclusion from the study can be drawn that government bonds are safe
investment strategy for the investors and it can help the investors in reaping the rewards to
the fullest.

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References:
Agyei-Ampomah, S., Gounopoulos, D. and Mazouz, K., 2014. Does gold offer a better
protection against losses in sovereign debt bonds than other metals?. Journal of Banking &
Finance, 40, pp.507-521.
Ciner, C., Gurdgiev, C. and Lucey, B.M., 2013. Hedges and safe havens: An examination of
stocks, bonds, gold, oil and exchange rates. International Review of Financial Analysis, 29,
pp.202-211.
Graham, J., Leary, M.T. and Roberts, M.R., 2014. How does government borrowing affect
corporate financing and investment? (No. w20581). National Bureau of Economic Research.
Lu, Y. and Sun, T., 2013. Local government financing platforms in China: A fortune or
misfortune? (No. 13-243). International Monetary Fund.