What Are The Different Types Of Bonds

In our article, “What are bonds?”, we explain what bonds are, how they work, and the role they can play in investment portfolios. At Rest, we believe bonds play a key role in a diversified portfolio by providing income and reducing overall risk through their role in diversification. Bonds can perform well during share market downturns and also offer regular interest payments, ensuring a steady income stream while helping to smooth out investment portfolio returns.

Did you know, though, that there are many different kinds of bonds? Let’s take a look at some of the most common types below.

Government bonds

Government bonds are issued by national governments to fund their operations or projects. In Australia, such bonds are known as Australian Commonwealth Government Bonds, while in the United States, they're called Treasury Bonds, or simply Treasuries.

Government bonds are typically seen as low-risk investments because governments back them, but the level of risk depends on the economic stability of the country issuing the bond. Government bonds from countries with stable economies, like Australia, pose lower risk, whereas bonds from countries facing economic or political instability are riskier, prompting investors to demand higher returns as a safeguard against potential losses.

Semi-government bonds

Semi-government bonds, or “semis” in Australia, are issued by state, territory, and provincial governments. They are generally issued to raise funds for public services and infrastructure projects in those states or provinces. While they may not be directly issued by the national government, semi-government bonds often still carry a relatively low level of risk. This is because they are supported by state government entities with the power to collect taxes or generate revenue through other means.

Green bonds

Green bonds are a recent development and are a special category of bonds used to finance projects with environmental or climate objectives, such as reducing pollution, building clean water infrastructure, and investing in renewable energy. Green bonds can be issued by companies, governments (national, state, or local), and financial institutions. Green bonds can vary widely in quality, and issuers of green bonds follow certain standards and undergo certification to demonstrate that their proceeds are used for genuine green projects with environmental value.

Can anyone invest in any kind of bond?

Yes and no. Investing directly in some kinds of bonds can involve high minimum purchases that put them out of reach of or are not appropriate for individual investors. Other bonds are simply not available on the retail market or are sold only to institutional investors like banks and super funds.

Individual investors can buy government bonds like Australian bonds directly from banks or brokers. Bonds can also be packaged up into bond funds or exchange-traded funds (ETFs), available to individuals to buy and sell. And if you’re a Rest member, Rest may invest in bonds on your behalf through our diversified investment options, including Growth.

Each bond type, from low-risk government bonds to higher-yielding corporate bonds, brings its own set of opportunities and risks. This diversity allows investors, including Rest, to craft investment portfolios that align with their specific goals and risk tolerance.