Detailed Analysis of Australian Bonds in Financial Markets

This assignment provides an analysis of Australian bonds, delving into various aspects of the bond market. It begins by defining bonds as debt securities issued by corporations or governments to raise capital, focusing on their trading on the ASX. The assignment then categorizes bonds based on interest rates and issuers, differentiating between fixed-rate, floating-rate, indexed, government, and corporate bonds. It explains bond ratings provided by Australian ratings, using the 'AAA' to 'BBB' scale and the Product Complexity Indicator (PCI). The analysis further explores Commonwealth Government Securities, highlighting their predictable cash flow and listing on the ASX. It compares these with corporate bonds, which offer higher returns but carry more risk. The assignment also details the calculation of Yield to Maturity (YTM), considering factors like coupon payments, par value, market price, and maturity. Finally, it addresses interest rate risk, discussing strategies to mitigate it, such as diversifying bond maturities and using interest rate swaps. The document includes references to relevant sources like ASX.com.au and Australian Mining.

Running Head: AUSTRALIAN BOND
AUSTRALIAN BOND
NAME OF THE STUDENT
NAME OF THE UNIVERSITY
AUTHOR NOTE

1Australian Bond
Table of Contents
Answer to the question 2.1 (1)..............................................................................................................2
Answer to the question 2.1 (2)..............................................................................................................2
Answer to the question 2.1 (3)..............................................................................................................3
Answer to the question 2.1 (4)..............................................................................................................3
Answer to the question 2.1 (5)..............................................................................................................3
References.............................................................................................................................................4

2Australian Bond
Answer to the question 2.1 (1)
Bonds are those loans that are usually made to the large organization and is a debt security.
When the corporations or the government need to raise the money, they have the scope to borrow
the money from the investors by means of issuing bonds to them. The bond gets quoted in the
security exchange which is ASX for Australia and this is where the bonds gets traded in Australia,
where the investor can realize their own investment by means of selling that bond, at the current,
price to the other investor. (Asx.com.au, 2020)
Bonds get categorized as per the interest rate they provide and the various types of bonds
traded in ASX are fixed rate bonds, floating rate bonds, indexed bonds and on the basis of the issuer
the bonds issued are government bonds, corporate bonds (Australiaratings.com, 2020).
Answer to the question 2.1 (2)
The bond rating is provided by the Australian rating and this shows their verdict over the
credit worthiness of the issuer of the security. It follows the alphabetical indicator of ‘AAA’, ‘AA’, ‘A’,
‘BBB’. For example the treasury bonds and treasury index bonds issued by the Australian
government has been assigned the ‘AAA’ credit rating which is the highest (Asx.com.au, 2020).
Another indicator of the ratings in the Australia is the PCI or the product complexity indicator, which
judges the security on the basis of the complexity and the terms of the security. Some examples that
comes under the jurisdiction of PCI is seniority of the debt and the likelihood of the recovery of the
assets and also the terms of the security. Example, the color of the Australian treasury bond is green,
which indicate that the terms of the bonds are simple.

3Australian Bond
Answer to the question 2.1 (3)
Commonwealth Government Securities are issued by the commonwealth of Australia and
they are available on ASX and they allow a predictable cash flow on the regular basis. They are listed
as Exchange-traded Treasury Bonds and Exchange-traded Treasury indexed bonds and they have a
fixed face value and the same annual rate while on the other hand corporate bonds offers higher
returns than cash or any government bonds; however lesser than shares. However, the corporate
bonds are less riskier than the shares that are issued by the same company (bonds and bonds, 2020).
Example of corporate bond being the Newcrest mining company, who has been raising the US
$1000million after the success of their corporate bind issues. (Australian Mining, 2020)
Answer to the question 2.1 (4)
Calculations of the YTM always assumes that all the coupon payments are reinvested in the
same rate as the bond’s current yield and will take into consideration the bonds par value, its
current market price, term of its maturity and the rate of interest of coupon. Therefore YTM is the
screenshot of the return from the bond since the coupon payments can’t be reinvested with the
same rate of interest. As a result if the interest rates gets increases the YTM also increases and
viceversa. Newcrest mining company YTM is 2.238 which indicate bond is moderate.
Source:(Asx.com.au, 2020)
Answer to the question 2.1 (5)
The vulnerability of the interest rate that gets changed in the fixed-income investment that
is termed as the interest rate risk. In order to avoid the interest rate risk, the investors can buy
bonds that gets mature at different dates. On the other hand they can also make use of the interest
rate swap and other instrument. It has to be noted that as the interest rate rises the price of the
bonds falls and vice versa.

4Australian Bond

5Australian Bond
References
Asx.com.au. (2020). Investment bonds are interest securities that pay a fixed or floating rate of
return. Learn more about investment bonds with ASX today.. [online] Available at:
https://www.asx.com.au/products/bonds.htm [Accessed 25 Jan. 2020].
Asx.com.au. (2020). Learn about credit ratings.. [online] Available at:
https://www.asx.com.au/products/credit-ratings.htm [Accessed 25 Jan. 2020].
Australian Mining. (2020). Newcrest to issue $1000 million in bonds - Australian Mining. [online]
Available at: https://www.australianmining.com.au/news/newcrest-to-issue-1000-million-in-bonds/
[Accessed 25 Jan. 2020].
Australiaratings.com. (2020). Market Insight. [online] Available at:
https://www.australiaratings.com/market-insight [Accessed 25 Jan. 2020].
bonds, A. and bonds, C. (2020). Corporate bonds | ASIC's MoneySmart. [online] Moneysmart.gov.au.
Available at: https://www.moneysmart.gov.au/investing/investments-paying-interest/bonds/
corporate-bonds [Accessed 25 Jan. 2020].