How to buy government bonds

Australian government bonds are now quoted on ASX so you can buy and sell them like shares in listed companies. To buy bonds on the stock exchange you will need to use a broker, who will charge brokerage for the transaction.
Before these bonds (called AGBs) started trading on ASX in May 2013, retail investors had to buy them directly from the Reserve Bank of Australia (RBA) "over the counter" Small Investor Bond Facility, for investors to buy and sell Australian government bonds in amounts between $1,000 and $250,000. You can buy both Fixed Coupon Bonds and Capital Indexed Bonds (also known as inflation linked bonds).
Reserve Bank of AustraliaThere was no online facility to buy these bonds from the RBA, and you had to buy them either in person at RBA offices in Sydney or Canberra, or by mailing in your purchase forms and a cheque for the purchase price and the RBA administration fee. 
To buy government bonds under the Small Investor Bond Facility needed to complete  these forms:
  1. a Purchase Form, which you can download here. If you do not fill in your tax file number (TFN) then tax may be deducted from your coupon payments.
  2. an Identification Reference Form, together with certified copies of the identity document or documents listed in the form. You can download the form here. Identity documents may include something with a photo and signature, such as a passport or driving licence (Australian or foreign). The purpose of this form is to prevent  government bonds being used for money laundering. 
  3. a personal or a bank cheque for the purchase price, which should be made payable to "Reserve Bank of Australia". Your payment should include the Bank's administration fee (see below) which is charged on top of the quoted bond sale prices.
The RBA charged an administration fee of $2.50 per $1,000 of face value of bonds that are either bought or sold. For example, a $25 fee would be charged to buy $10,000 of government bonds.
The completed forms and cheque can either be taken to the RBA office in Canberra or at its Martin Place office in Sydney, or they can be mailed to the RBA's Registry of Inscribed Stock. The mailing address is The Registrar, Registry of Inscribed Stock, Reserve Bank of Australia, GPO Box 1585, SYDNEY NSW 2001.

How to sell government bonds

Although the RBA has now closed its over the counter market for retail investors to buy bonds, they will still let you sell your bonds back to the RBA, which publishes a buy price as part of its Small Investor Bond Facility. The buy price will be slightly lower than the sale price for the same type of bonds on the same day. Although this does not have the same level of competition as a public market, the RBA does base its buy and sell prices on bond market prices.
You should be aware that the bond buying price could be lower than the face value of the bonds, and lower than your original purchase price. If you hold your bonds to maturity then full repayment of principal is guaranteed by the Commonwealth Government, but there is no guarantee of the market value of government bonds at any point before maturity.


Bond funds

An alternative to buying bonds directly is to buy units in a professionally managed government bond fund, such as the Vanguard Australian Government Bond fund. A bond fund provides more diversification across maturities, and includes some state government issues together with Commonwealth government debt securities for an enhanced return. This may be an attractive feature for investors who do not have the time or aptitude to buy and monitor a direct investment in bonds.
The downside of investing in a bond fund is that the fund manager takes a fee for its work out of the fund, and there are typically entry and exit costs which may exceed the cost of direct investment via the RBA's Small Investor Bond Facility.