Home › Academy › Bonds and fixed income
Intermediate · Lesson 1 of 5How bonds work
A bond is a loan to a government or company. The issuer pays interest (the coupon) and returns the face value at maturity. Australian Commonwealth Government bonds trade on the ASX as Exchange-traded Treasury Bonds, and many people own bonds through ETFs or super funds.
Bond prices move opposite to interest rates. If you hold a 3% bond and new bonds pay 5%, nobody pays full price for yours, so its price falls until its yield matches the market.
Yield to maturity (YTM) is the total yearly return if you buy at today's price, hold to maturity and every payment is made. It combines the coupon with any gain or loss from buying below or above face value.
Key takeaways
- A bond is a loan paying coupons and returning face value.
- Prices fall when rates rise, and rise when rates fall.
- YTM is the best single measure of a bond's return.
Check your understanding
1. Interest rates rise sharply. Existing bond prices...
- Rise
- Fall
- Stay the same
- Double
Show the answer
Fall. Older, lower-coupon bonds become less attractive.
2. A bond bought below face value and held to maturity will have YTM...
- Below its coupon
- Above its coupon
- Equal to zero
- Equal to inflation
Show the answer
Above its coupon. You also gain the difference up to face value.
Go deeper
- Wikipedia: Bond (finance)
- YouTube videos: how bonds work yield price explained
- Investopedia: bond basics
- Wikipedia: Yield to maturity
- ASX: exchange traded bonds
- Moneysmart (ASIC): bonds
Practise this in Vestora
Look up real shares, test ideas with paper trading, and track your progress through the course.
Open the app freeGeneral education only, not financial advice. Examples are illustrations. Rules, tax settings and products change; check official sources.