The skinny on bonds and fixed interest

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Welcome to Finance & Fury, the ‘Say What Wednesday’ edition. This week’s question comes from Gab;

“Hi Louis, I was looking at different asset classes and how someone could get exposure to them (outside superannuation) and got stuck on "fixed income". If I understand this asset class correctly, if you hold to maturity you get all the capital back. But if you buy ETFs or managed funds you lose this benefit (as you basically just get exposure to the secondary market). Also, I thought the fees were ridiculous, especially with active managers charging 0.5%, when the long-term return is 5-6%. What are your thoughts on this? Thanks, Gab (keep up the good work!)"

Hi Gab, Great question!

Today we’ll focus on explaining Fixed Interest in straightforward terms;

  • What are Bonds, why do they exist, and how do they work?
  • Price, ‘Face Value’ and coupon rate
  • Buying and selling bonds
  • The effects of interest rates on the value of bonds
  • Bond managers – Managed funds or ETFs
    • The role of Bond Managers
    • Costs compared to returns
    • Index bonds
    • Active managers
  • Why buy bonds or other fixed interest assets?
    • Downside protection
    • Higher yield than cash
    • Middle ground to cash
  • The risks and disadvantages
    • Ratings system
    • Maturity
    • Duration
    • Interest rate movements
  • What I look for when buying bonds
  • Franking credits on coupons

If you have a question, or want us to cover something else in more depth, let us know at the contact page https://financeandfury.com.au/contact/.

Thanks again for listening guys. Until next time!

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