PArT 2: VALUATION, rISk AND reTUrN
bond’s value falls from €1,000 to €794.35, an investor holding the bond experiences an opportunity
loss. Because the bond’s price has fallen, the investor no longer has the opportunity to invest €1,000
elsewhere.CONCEPT REVIEW QUESTIONS 4-2
5 How is a bond’s coupon rate different from its coupon (current) yield?6 In general, when will a bond sell at a discount?7 Explain the meaning of the term interest rate risk.8 Why do bond prices and bond yields move in opposite directions?4-3 TYPeS OF BONDS
The variety of bonds trading in modern financial markets is truly remarkable. In this section, we offer
a brief description of the most common types of bonds available today. Many investors see bonds as a
rather unexciting investment that provides a steady, predictable stream of income. That description fits
some bonds reasonably well, but many bonds are designed with exotic features that make their returns
as volatile and unpredictable as ordinary shares.
Bond trading occurs in either the primary or secondary market. Primary market trading refers to the
initial sale of bonds by companies or government entities. Primary market trading varies depending on
the type of bond being considered. For example, the Australian government sells its Commonwealth
Government bonds through an auction process operated by the Australian Office of Financial
Management (AOFM). Most bonds sold at these auctions go to a relatively small group – about 18
organisations – of authorised government bond dealers or ‘registered bidders’. Individual investors can
buy or sell Australian government bonds through the Australian Stock Exchange (ASX). These are known
as ‘exchange-traded Treasury Bonds’ or eTBs, and are traded on the ASX as one would buy and sell shares.
The dominant dealers in the Australian bond market are associated with the ‘big four’ banks (ANZ,
Commonwealth, NAB and Westpac) and large overseas banks.
State governments also issue bonds in Australia: these are usually called ‘semi-government bonds’,
and the funds raised are used for state government infrastructure projects (about two-thirds of the
funds raised) and operational spending. At the end of 2014, the total of long-term and short-term semi-
government bonds was over $250 billion.^8 Queensland and New South Wales were the largest issuers of
semi-government bonds at this time.
In New Zealand, government bonds are sold to registered tender counterparties, who may on-sell
them to individuals; but such sales must be recorded in government databases.8 Macquarie Bank, ‘The Australian government bond market’. http://www.macquarie.com.au/dafiles/Internet/mgl/au/mfg/mim/docs/mim-investment-
perspectives/ip-australian-government-bond-market.pdf?v=8. Accessed 15 December 2015.LO4.3