2.

1
Fact finding of Australian Bond Market
Conduct a research and present an Analysis of Australian Share Market. The
following questions should be answered:
1. Where the bonds are traded secondarily in Australian market? What are the
types of bonds traded in that market place?
2. Give details about Bond rating services in Australia.
3. Differentiate between Australian Government Bonds and Australian Corporate
Bonds.
4. What is interest rate risk and how does it affect bond price?
Answer: Bonds are security investments over debts. Trading of bonds between the owner
and investor occurs through a specific platform in every country. Australian Security
Exchange (ASX) is the Platform where primary as well as secondary trading of bonds is
carried out is carried out in Australia. The overall classification of the bonds traded in this
market is as follows:
1. Based on type of interest:
a. Fixed rate bonds
b. Floating rate bonds
c. Indexed bonds
2. Based on type of issuer:
a. Government bonds
i. Exchange-traded treasury bonds
ii. Exchange-traded treasury indexed bonds
b. Corporate bonds
3. Based on complexity of bonds:
a. Simple bonds
b. Complex bonds
(Cbonds.com. (2020))

The Australian Government Securities are also traded on secondary markets like
Yieldbroker DEBTS, Tradeweb, and Bloomberg Bond Trader domestically as well as
internationally.
The Australian Government Bonds are offered by Commonwealth of Australia whereas the
Australian Corporate Bonds are offered by private sectors or industries. The primary
difference between them lies in the risk associated with both types of bonds. The
government bonds are less risky than corporate bonds. Moreover, interest rates of
corporate bonds are totally dependent on inflation while the interest rates of government
bonds are not affected by market prices/ values. If the company decides to shut down itself
or suffers a loss you may not get interest on the bonds of that company. Even, you may
lose your principal amount in such case. But this is never the case with government bonds.
You get your interest quarterly or as per the specifications of the bond. But when you
decide to sell a government bond before maturity on ASX, you have to accept the selling
price according to the market value (it can be lower or higher). ( Asx.com.au. (2020))
Choosing a bond for investment
3 major agencies namely Moody’s, Fitch Ratings, and Standard & Poor’s ratings provide
bond ratings which guides the investor to choose the bond for investment. ( Genc, E. and
Başar, Ö. (2020))

The above table contains the complete list of grades that describe the quality of bond.
(Google.com. (2020))

ROI of bonds
Coupon Rate and Yield To Maturity (YTM) are the terms that describe the ROI of
investment in any bond. The interest that is actually earned on the bond each year on the
basis of its face value is known as coupon rate. While, Yield to Maturity is rate of return
estimated on the basis of assumptions made till the date of maturity including the coupon
rate. (Investopedia. (2020))

For example, a bond is has a face value of Rs 1,000, and is issued with a semi-annual
payment of Rs 10. The annual coupon rate for this bond is equal to Rs 20 ÷ Rs 1000 =
2%. Now at face value, the coupon rate and YTM equal each other. If you sell your bond at
a premium of Rs. 500, the bond’s YTM is now Rs 20 / Rs 1,050 = 1.90%. Assuming that
the interest rates increased and you bond price fell to Rs 990, your YTM from selling the
bond will be Rs 20 / Rs 990 = 2.02%.
The danger that the value of a bond/ other fixed-income investment is assumed to suffer
due to the change in interest rates is termed as interest rate risk. Although bonds have a
specific rate that remains fixed, their price depends on the interest rates. Higher the
interest rates, higher will be the price of bonds at their maturity. So, people mostly invest in
the bonds with shorter maturity period and higher interest rates.

Reference:
1.  Cbonds.com. (2020). Australia bond market - corporate bonds, global bonds, rating, debt. [online]
Available at: http://cbonds.com/countries/Australia-bond [Accessed 19 Jan. 2020].
2.  Genc, E. and Başar, Ö. (2020). Comparison of Country Ratings of Credit Rating Agencies with
MOORA Method. [online] Semanticscholar.org. Available at:
https://www.semanticscholar.org/paper/Comparison-of-Country-Ratings-of-Credit-Rating-with-
Genc-Ba%C5%9Far/c73cc42e49c8fb4b5c1028e7aa4f77bb2e5f3a67 [Accessed 19 Jan. 2020].
3.  Google.com. (2020). Redirect Notice. [online] Available at: https://www.google.com/url?
sa=i&source=images&cd=&ved=2ahUKEwj0vZ_MxI_nAhVSzDgGHR_GBwwQjRx6BAgBEAQ&url=h
ttps%3A%2F%2Fwww.semanticscholar.org%2Fpaper%2FComparison-of-Country-Ratings-of-
Credit-Rating-with-Genc-Ba%25C5%259Far
%2Fc73cc42e49c8fb4b5c1028e7aa4f77bb2e5f3a67&psig=AOvVaw2QE_jOH7MtV61mqsajLvuv&
ust=1579518905047416 [Accessed 19 Jan. 2020].
4.  Asx.com.au. (2020). View the list of Exchange-traded Australian Government Bonds.. [online]
Available at: https://www.asx.com.au/products/bonds/list-of-agbs.htm [Accessed 19 Jan. 2020].
5. Investopedia. (2020). Yield to Maturity vs. Coupon Rate: What's the Difference?. [online] Available
at: https://www.investopedia.com/ask/answers/020215/what-difference-between-yield-
maturity-and-coupon-rate.asp [Accessed 19 Jan. 2020]
 2.2
Fact Finding About Australian Share Market
Conduct a research and present an Analysis of Australian Share Market. The
following questions should be answered:
1. What is the name of listed stock market in Australia and how is it operated?
2. What is market capitalization of a listed company and how is it computed?
3. Share index of Australia-historical and current facts.
4. Comment on the trends of share market.
Australian Security Exchange (ASX) is the listed stock market in Australia. With a daily
turnover of approximately A$4.685 billion, ASX has a market capitalization of over A$1.9
trillion.Companies get listed on such stock exchange platforms in order to raise their
capital by selling their shares to the investors. These platforms are then open for the stock
buyers along with the sellers. (Asx.com.au. (2020)) Moreover, a third entity i.e. brokers are also
present to assist the buyers and the sellers and earn profit out of the trading of stocks. Any
movement in the rates of the stocks is reflected as points or percentage on S&P/ASX 200
index. Today, there are more than 2,000 companies that have their place in the list of ASX.
At present, approximately 15 lakh shares belonging to these companies are traded every
day. (Asx.com.au. (2020))

Date Equity Interest Rate Listed Warrants & Structured

trades and ETOs Products
Hybrid
Securities
Dec 29,371,658 25,709 6,061,434 21,376
2019
Nov 35,084,342 29,957 6,011,416 25,103
2019
Oct 37,386,972 28,107 5,989,573 24,302
2019
Sep 36,245,224 27,192 7,017,490 22,827
2019
Aug 39,505,644 29,486 7,036,572 32,252
2019
Jul 2019 36,957,887 36,762 6,469,995 25,082
Jun 32,386,285 32,626 7,423,667 20,461
2019
May 36,440,639 33,725 7,727,279 25,529
2019
Apr 28,005,012 30,978 6,630,202 18,743
2019
Mar 32,747,314 37,910 7,349,970 22,395
2019
Feb 32,297,078 30,192 7,191,117 26,292
2019
Jan 26,511,883 23,020 5,953,651 20,585
2019
Table. Monthly trading volume of shares in Australia. (Asx.com.au. (2020).)
ASX publishes market capitalization values of the listed companies
An investor can find market capitalization of each company listed under ASX on the
company information page of ASX website. It is an approximate calculation of market
value of the company. This is determined by following formulae:
Market capitalization of a company = last traded price of the company’s ordinary securities
quoted on ASX on previous trading day X number of ordinary securities on issue.
(Asx.com.au. (2020))

How to decide the quality of shares?

Share market indexes depict the quality of shares in any share market. Australian share
market also has multiple indexes to list the quality of the shares. One of the oldest share
indexes in Australia is All-Ordinaries index which started back in January 1980. It is
popularly known has “All Ords” share index. It had a base index of 500 in the beginning.
Today, it has an index value of 5000. Thus, the value of all the stocks listed in this index
has been increased by five folds since inception of “All Ords” index. ( Shareswatch.com.au.
(2020))

Figure. All Ords index last 5 years chart (Shareswatch.com.au. (2020))

There are many share market indexes published on ASX by S&P. One of the popular
index is S&P/ASX 200 index. Basically, S&P tracks the best 200 companies out of the
listed companies in ASX and ranks them based on their performance. It helps the buyers
to judge the performance of the companies. Any movements in the rates of shares is
reflected in percentage as well as points on S&P/ASX 200 index. ( Asx200list.com. (2020))
Fig. S&P/ASX 200 index of Australian stock market ( Asx200list.com. (2020))

Selection of the ASX 200 companies

The ranking and selection criteria for ASX 200 companies are decided by a committee with
members from:
1. S&P i.e. Standard & Poor
2. ASX i.e. Australian Security exchange
The stocks must reach a minimum trade volume and investment benchmarks for the
company to be eligible for inclusion in the S&P/ASX 200 index. Regular rebalances in this
index are conducted every quarterly i.e. in the month of March, June, September and
December. (Asx.com.au. (2020))

Further, other indexes such as S&P 500 are also mentioned in order to help the buyers
make best choice for investment.

References:
1. Asx.com.au. (2020). [online] Available at: https://www.asx.com.au/asx/statistics/tradingVolumes.do
[Accessed 20 Jan. 2020].
2. Google.com. (2020). Redirect Notice. [online] Available at: https://www.google.com/url?
sa=i&source=images&cd=&ved=2ahUKEwjP8Z6xuZHnAhV0IbcAHfoVARwQjRx6BAgBEAQ&url=https%3A
%2F%2Ftradingeconomics.com%2Faustralia%2Fstock-
market&psig=AOvVaw2OXO8e4aIfj2gIGM7Q5lWa&ust=1579584534489751 [Accessed 20 Jan. 2020].
3. Asx.com.au. (2020). Market Capitalisation and Number of Ordinary Securities published on asx.com.au.
[online] Available at: https://www.asx.com.au/prices/methodology-for-market-cap.htm [Accessed 20 Jan.
2020].
4. Asx200list.com. (2020). ASX 200 List of Companies - Directory. [online] Available at:
https://www.asx200list.com/ [Accessed 20 Jan. 2020].
5. Shareswatch.com.au. (2020). ASX All Ordinaries Index - review of 5, 10 and 25 year charts | Shareswatch
Australia. [online] Available at: https://www.shareswatch.com.au/blog/asx/asx-all-ordinaries-index-review-
of-5-10-and-25-year-charts/ [Accessed 1 Feb. 2020].