Common types of bonds

Lorna Tan
FEB 26, 2017

You can invest in different types of bonds, depending on your objectives.

Common types include those issued by the Government or corporates and perpetual bonds. There are also bond funds or bond exchange-traded funds.

In recent years, retail investors have the option of investing in bonds issued by local firms such as Aspial Corp, Perennial Real Estate Holdings and Oxley Holdings. In September 2015, the Government introduced the risk-free and flexible Singapore Savings Bonds (SSBs), which come with guaranteed step-up interest rates.

GOVERNMENT BONDS

The Government issues bonds as a form of borrowing to support spending. Such bonds are generally considered as having lower risk because they are backed by the credit of the Government, so default is unlikely.

This is why interest rates on government bonds tend to be lower than those of other issuers.

In Singapore, both retail and institutional investors can buy Singapore Government Securities (SGS) that are backed by the Government.

Unlike many other countries, the Singapore Government does not need to finance its expenditures through the issuance of government bonds as it operates a balanced-budget policy and often enjoys budget surpluses.

SSBs

SSBs are designed specifically for retail investors as a low-cost and low-risk savings product. They are safe as they are issued and backed by the Singapore Government.

The longer you hold your bond, the higher your return. SSBs pay interest rates of 2 to 3 per cent if held for 10 years. Interest payments are paid every six months and, on maturity, you will get back your full principal amount.

There is no investment fee or charge, apart from the $2 fee levied by banks for application and redemption requests.

Although there is a 10-year tenure, SSBs provide a flexible redemption option so you do not have to decide at the start how long you want to hold them. You can get your funds back within a month, with no penalty and no capital loss.

Individuals can apply for and redeem SSBs through local bank ATMs, via OCBC OneWealth app or via DBS/POSB Internet banking channels.

You can apply for each Savings Bond issue with as little as $500, and up to $50,000. In addition, you will be able to hold up to $100,000 of SSBs at any point in time.

How are SSBs different from conventional SGS?

Firstly, SSBs are not tradeable while conventional SGS can be sold on the Singapore Exchange. However, this means that the prices of conventional SGS can change, depending on market interest-rate movements and financial market conditions.

So you may receive more or less than your invested capital if you sell your conventional SGS in the secondary market before maturity, said MoneySense, the national financial education programme.

Secondly, you can redeem the full principal amount for SSBs in any given month, without any capital loss. However, early redemption for conventional SGS is not available.

Finally, SSBs have a lower minimum investment amount and unit size of $500, compared with $1,000 for conventional SGS. Individuals can hold up to $100,000 of SSBs at any point in time, but there are no investment limits on conventional SGS.

CORPORATE BONDS

Corporate bonds usually pay higher interest rates than government bonds because they generally carry more risk.

You can purchase corporate bonds listed on the SGX in the same way as you would buy equities, paying the normal brokerage fees.

While corporate bonds may offer better returns than savings and fixed deposits, note that you will be exposed to credit and other risks. You should therefore consider whether you are able and willing to bear a higher risk of default and risk losing part or all of your investment, in return for higher yields.

PERPETUAL SECURITIES

Perpetual securities are also known as perpetual notes, perpetual bonds or perpetual capital securities. They are hybrid securities that combine the features of both debt and equity. Some examples include those offered by the local banks and firms like Hyflux and Genting.

Though perpetual securities have some bond-like features, such as coupon payments, they are not plain-vanilla bonds.

Firstly, perpetual securities do not have a maturity date.

Secondly, the issuer may, but is not obliged to, redeem them. If the issuer does not exercise the redemption option, you can exit your investment only by selling the perpetual securities in the secondary market. So you will be exposed to market price fluctuations and liquidity risks.

In some issues, it is also possible for the issuer to have the right to defer the coupon payments. In the event of a winding up of the issuer, holders of perpetual securities normally rank ahead of ordinary shareholders but behind other senior creditors for a share of the proceeds of sale of the issuer's assets.

If a bond is called or redeemed when prevailing interest rates are lower than at the time you bought it, you will be exposed to re-investment risks.