Understanding Fixed-interest Investments

The Basics of Investing in Fixed Interests for Australian Households

Aug 8, 2009 Wei Yin Wong

Fixed-interest investments such as government and corporate bonds, fixed-term deposits, debentures and unsecured notes can bring high returns over a longer time frame.

Australian households interested in increasing their savings can turn their focus on fixed-interest investments. Like bank accounts, fixed-interest investments pay a return through interest, not capital growth. The difference is that the money tends to be invested for a fixed time or longer period.

In general, fixed-interest investments such as government or corporate bonds, fixed-term deposits, debentures, unsecured notes and mortgage trusts share three major features:

• The fund is invested as a loan for a fixed upfront interest rate.
• The investor will be repaid the initial capital in full at a maturity date.
• The investor will also get interest payments regularly or upon the maturity of the investment.

Here’s a quick look at the aforementioned fixed-interest investments.

Government Bonds

These are loans given to the government to help fund big projects or finance growth for a fixed period of time at a fixed interest rate. Because both the capital sum and interest are guaranteed by the government, government bonds are a highly secure investment. The trade off for the security is a lower rate of return.

Corporate Bonds

Corporate bonds are also known as debt securities. In Australia, these are usually listed on the Australian Stock Exchange (ASX). Through brokers, investors can buy bonds with a small capital.

Fixed-term Deposits

These are funds lent to a bank or financial institution for a fixed period of time with fixed interest rate. The longer the term or the more money is invested, the higher the interest rate can be set. Fixed-term deposits are favored by Australian households because they are a low risk investment. This is due to the fact that banks and financial institutions offering them are regulated by the Australian Prudential Regulations Authority (APRA).

Debentures

Debentures are loans to the debenture issuer – usually a finance company. The money in turn is lent to borrowers such as small business owners, self-employed people and property investors who have chosen not to borrow from banks or who do not meet the criteria to get loans the traditional way.

By investing in a debenture, an investor is actually lending money to a business with all the risks involved. Because of the higher risks, they tend to bring higher returns compared to government bonds and fixed-term deposits. Australian families keen on knowing more about investing in debentures should read more about it from the Australian Securities and Investments Commission (ASIC) website.

Unsecured Notes

Like debentures, unsecured notes are issued by finance companies. Investors rely solely on the company’s financial strength and security. That’s why although unsecured notes typically offer higher rates of interest than debentures of the same fixed period, they lack the security that debentures offer.

Mortgage Trusts

While mortgage trusts sound a lot like property investments, they are actually a type of cash lending investment. When someone invests in a mortgage trust, his money and the money of other investors are lent to other parties to invest in property. The return comes in the form of an interest rate based on the interest that those other parties are paying for the money lent to them. Prospective Australian mortgage trust investors should minimize risks by investing in registered trusts regulated by ASIC.

Families who are looking to invest in a longer term through the use of cash should find out more about fixed-interest investments. These include government and corporate bonds, fixed-term deposits, debentures, unsecured notes and mortgage trusts.

Found this article useful? Read also Understanding Share Investments, Understanding Cash Investments and Understanding Property Investments.

References:

Australian Securities and Investments Commission Website – Cash and Fixed Interest Investments

Australian Stock Exchange – Interest Rate Securities

The copyright of the article Understanding Fixed-interest Investments in Family Finances is owned by Wei Yin Wong. Permission to republish Understanding Fixed-interest Investments in print or online must be granted by the author in writing.

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