Australian Government Bonds

Hi Richard,

Bonds are initially issued on a set yield. If interest rates go up after they are issued, then the price of the existing issue will go down, and vice versa if rates fall. The GSBG37 if bought today at $95.35 is on a yield of 3.9% (having been issued on a yield of 3.75%). The GSBG27 if bought today at $103.59 is on a yield of 4.58% (having been issued on a yield of 4.75%). However, we then need to factor in capital gain or loss between now and maturity. Buying the GSBG27 will equate to a $3.59 capital loss and the GSBG37 will equate to a $4.65 capital gain. The yield to maturity takes this into consideration (yield +/- capital gain)

The yield to maturity on the GSBG27 is therefore 3.22% pa while the yield to maturity on the GSBG37 is 4.27% pa. The GSBG37 is trading below par ($100) because interest rates have risen since this was issued in November 2015. At that time, the cash rate was 2%.