Low entry point of $2k, yearly 4.35% coupon payout appeal to retail investors
Lorna Tan
Invest Editor/Senior Correspondent
June 10 2018
Retail investors who want to diversify and try their hand in private equity can now do so via the newly launched Astrea IV private equity bonds.
The features appear attractive at first glance when compared with other bonds. There is a low entry point of $2,000 with a yearly coupon payout of 4.35 per cent.
The holding period can be as short as five years for a full redemption of your principal, or less as the bonds are tradeable on the Singapore Exchange (SGX).
In fact, Astrea IV's Class A-1 bonds will be the first listed retail private equity bonds on SGX.
The launch has made headlines because private equity investments are not usually easily accessible to retail investors, as they require large sums of capital and long holding periods of 10 years or more.
That has meant that private equity is typically accessible only to institutions and wealthy investors.
In recent years, interest in private equity has surged as investors seek higher returns from non-traditional sources.
Information provider Preqin estimates that assets under management in private equity have grown 11 per cent a year since December 2000, and hit US$4 trillion (S$5.3 trillion) as at September last year.
The Sunday Times highlights what you need to know about Astrea IV.
WHAT IS PRIVATE EQUITY?
Private equity refers to investments in private firms or listed companies that may be acquired and privatised. It is largely done via private equity funds managed by professional managers who raise money from investors.
These funds aim to improve the operations and financial performance of the firms they invest in and then exit the investments for a profit.
Historically, private equity has outperformed the public market indices such as the S&P 500 Index and MSCI World Index over an extended period.
WHAT ARE ASTREA IV PRIVATE EQUITY BONDS?
The bonds have been launched by Azalea Asset Management, a Temasek Holdings subsidiary.
There will be three classes of bonds issued under Astrea IV to raise a total of US$500 million.
The least risky Class A-1 bonds will raise $242 million, split equally between retail and institutional investors here.
Class A-2 bonds, which carry an annual interest rate of 5.5 per cent, are expected to raise US$210 million, while Class B bonds (at 6.75 per cent) would raise US$110 million. Both classes are not available to retail investors and offer higher returns to compensate for the relatively higher risks.
Astrea IV's Class A-1 private equity bonds are the first in the market to break down entry barriers for retail investors by lowering the initial investment amount to just $2,000 and reducing the investment period to as short as five years.
The bonds are backed by cash flow from a diversified portfolio of 36 private equity funds invested in 596 firms in a range of industries, including consumer, information technology, healthcare and financial. These funds are valued at about US$1.1 billion in all.
Such diversification helps to minimise the impact of the poor performance of any one fund.
Note that the funds' average age is seven years, which means that many of them are in the cash-generating stage of a typical private equity fund's 10-year lifespan.
As such, Mr Sam Phoen, co-founder of Wateram Capital, expects cash flow to be positive.
In the initial years, a typical private equity fund tends to exhibit negative net cash flow due to drawdowns to fund new investments, as well as fees and expenses.
However, in the later years (usually after five years), a fund will achieve net positive cash flow when divestments are made.
On a geographical basis, Astrea IV has 62.8 per cent concentrated in United States-focused funds, followed by Europe at 19.1 per cent and the rest in Asia.
Its strategy is largely to focus on private equity buyout funds which purchase controlling stakes in the firms they invest in.
While many retail and some corporate bonds are not rated, the Astrea IV Class A-1 bonds carry an expected rating of Asf, with "sf" denoting the rating for structured finance.
Astrea IV's structure is broadly similar to Astrea III, a private equity bond with an annual 3.9 per cent yield that was issued in 2016 and available only to institutional and accredited investors.
It was eight times subscribed and raised about US$510 million.
INTEREST RATES AND EXIT
In a nutshell, Astrea IV private equity bonds will pay regular interest to bond holders and repay the principal at maturity. However, the interest is not guaranteed and the bonds themselves are not guaranteed by Azalea nor Temasek.
Such income to investors is generated through cash flow from private equity funds, including when firms that the funds invested in are sold.
Class A-1 bonds will pay a non-guaranteed interest of 4.35 per cent a year every six months. For a principal amount of $10,000, the interest payment works out to $217.50 on a half-yearly basis.
In addition, Class A-1 bond holders will receive a bonus payment of 0.5 per cent of principal at redemption if a performance condition is met.
This would be when the sponsor - Astrea Capital IV, wholly owned by Azalea - receives 50 per cent of its equity investment or US$313 million on or before the scheduled call date on June 14, 2023.
This is the earliest date the issuer can redeem the bonds if the cash set aside is sufficient to redeem all Class A-1 Bonds.
If the Class A-1 bonds are not redeemed in 2023, there will be a one-time step-up interest rate of 1 per cent a year.
The final maturity of the bonds is in 10 years or on June 14, 2028.
However, investors can sell their holdings on the SGX when the bonds start trading on June 18.
"As A-1 bonds are traded on the stock exchange, it provides daily liquidity to investors, an uncommon feature for PE (private equity) investments due to the long lock-up period," said Mr Phoen.
TARGET CUSTOMER SEGMENT
Private equity bonds are targeted at investors who want regular income at a fixed rate rather than capital growth. Note that returns are limited to the bond coupon, as returns of higher multiples typically associated with successful private equity investments do not apply here.
Early last week, Temasek Holdings chief executive Ho Ching referred to the Astrea IV offering as a way to help enhance individuals' retirement savings.
Mr Kelvin Goh, head of investments at OCBC Bank, said that as part of an overall diversification strategy, these bonds may be useful for investors looking for income strategies that are different from traditional income sources.
SAFEGUARDS
There are several safeguards in place which help to mitigate against potential risks and to ensure that sufficient funds are available to fulfil interest payment and principal repayment obligations.
Reserve accounts are set up and measures - for example, cash is set aside every six months - are put in place to enable a fast build-up of cash reserves for the redemption of all Class A-1 and A-2 bonds on the scheduled call date in June 2023.
The debt-level limit is set at 50 per cent, which will trigger action to lower the total net debt if crossed.
Besides foreign exchange hedging, there are also bank facilities set up which will cover taxes and administrative expenses, management fees and interest payments to bond holders in the event of cash flow shortfalls.
HOW TO APPLY UNDER THE PUBLIC OFFER
The Astrea IV Class A-1 bonds have been available for public subscription through DBS (including POSB), OCBC and UOB ATMs, Internet banking platforms and DBS mobile banking platform since Wednesday.
Applications close at noon on Tuesday. The bonds can be bought with cash but not with Central Provident Fund savings or Supplementary Retirement Scheme funds.
POTENTIAL RISKS
As with any investment, it is prudent to understand the underlying risks involved before investing.
•Fluctuating interest rates may affect the bond price Changes in market interest rates may adversely affect the value of the bonds. Like all fixed-rate bonds, the market price could fluctuate due to interest rate movements. Generally, a rise in interest rates may cause a fall in the prices of bonds, while a fall in interest rates may lead to a rise in bond prices. There is no assurance that low interest rates will persist.
•Uncertainty on cash flows The ability of the issuer to make payments and the timing and amount of such payments on the bonds are highly dependent on the performance of the Astrea IV fund investments. These can be highly variable and there is no assurance that any fund will achieve its investment objectives.
•Adverse market conditions could impact distributions As with all other investments, an adverse change in market conditions could result in falling asset prices and cash flows, said Mr Kelvin Goh, head of investments at OCBC Bank. This would impact the amount or timing of distributions from the underlying private equity fund investments.
•Limited trading market There may be a limited trading market for the bonds, so prospective investors must be prepared to hold their bonds until the maturity date.
•Illiquidity of private equity investments and reliance on key private equity professionals There are risks associated with the illiquid nature of private equity fund investments, and reliance on key private equity professionals in managing these funds, adds Mr Goh.
•Limited disclosures from underlying private equity funds Bond holders will receive limited information regarding the private equity funds that form the Astrea IV portfolio due to the nature of such fund investments, which usually require investors to keep certain information confidential.
Showing posts with label bonds. Show all posts
Showing posts with label bonds. Show all posts
Sunday, June 10, 2018
Sunday, February 26, 2017
Be mindful of these risks when investing in bonds
Lorna Tan
Feb 26, 2017
As with most forms of investment, you can lose part or even all of your capital when investing in bonds.
For instance, when an issuer defaults, it is unable to provide regular interest payments or return the original investment amount to the bondholder upon maturity. You as a bondholder may then lose all or a substantial part of your investment. Not all bonds are created equal, so do your own due diligence before applying to buy them.
In a nutshell, the higher interest rates offered by corporates are to compensate the investor for taking on higher risks, which include the credit risk of the issuer (risk of not being repaid if the issuer defaults), liquidity risk (risk of not being able to readily sell the bond and get back your investment proceeds at any time), and market risk (risk that interest-rate movements cause the bond to decrease in value).
Hence, it is prudent when investing to ask what could cause you to lose money and what is the maximum you could lose.
Here are five risk factors that can impact your bond investments.
DEFAULT AND CREDIT RISK
Default risk can change due to broader economic changes or changes in the financial situation of the company or country.
A firm with poor credit fundamentals may go bust or default on its debt and coupon payments, and it is best for investors to be cautious of such companies.
Mr Vasu Menon, OCBC Bank's senior investment strategist, suggests checking out financials such as the firm's debt-to-equity ratio. This measures how much debt an issuer is using to finance its assets and operations.
"It is important to assess if a company is too heavily indebted. A company with too much debt may run into difficulties servicing its debt and may be forced to sell off assets or declare bankruptcy," he added.
"A ratio of less than 0.5 times would be ideal. However, there may be times when a company has a significant cash hoard, strong and positive operating cash flow and good business prospects, in which case, a ratio of more than 0.5 times would still be acceptable.
"However, even for such companies, ideally, the debt-to-equity ratio should not exceed one.
"It may also be advisable to compare the company's debt-to-equity ratio with its peers'. If the ratio is significantly higher, this would be a worrisome sign."
Another way of assessing the firm's financial health is to look at the balance sheet. If the company is suffering from a negative operating cash flow - it is spending more cash than it is generating - or has a low interest coverage ratio of less than 2.5 times, be wary.
POOR CREDIT RATINGS
Note that bond prices are affected by the perceived credit quality or probability of default of the issuer.
This explains why there are advantages to bond issues that have attained credit ratings as they provide a quick, independent and comparable assessment of an issuer's creditworthiness.
Ms Chung Shaw Bee, UOB's head of wealth management for the region and Singapore, said: "The rating is indicative of the issuer's ability to keep up with the expected coupon payment and to return investors' capital upon maturity. However, there are currently a number of bonds that are not rated."
Mr Daryl Liew, co-chair of the Advocacy Committee at CFA Singapore, said: "If the bond has a credit rating, then potential credit-rating downgrades would suggest that something is amiss."
This is why the Monetary Authority of Singapore (MAS) is encouraging bond issuers to obtain credit ratings for their bonds, as the rated issuances will improve transparency in the bond market.
Last November, the regulator announced incentives to offset the costs associated with getting a rating.
"Qualifying Asian issuances will be able to offset up to 50 per cent of one-time issuance costs such as credit-rating fees, international legal fees and arranger fees," the MAS told The Sunday Times. "Even as we draw Asian issuers to Singapore, we want to encourage these issuers to be rated... Rated issuers will be eligible for a larger grant quantum under the Asian Bond Grant."
PRICE AND INTEREST-RATE RISK
A basic relationship that bond investors must note is that interest rates and bond prices move in opposite directions.
So if prevailing interest rates rise, you will likely see a fall in bond prices, and vice versa. If bond prices fall, you could experience a capital loss if you sell the bonds before maturity.
Mr Liew advises that it is important to have an outlook on interest rates when considering bond investing as this could dictate the kind of bonds you would prefer.
"For instance, in a rising interest-rate environment, investors may prefer to stick to shorter-duration bonds or floating-rate bonds," he said.
Mr Menon notes that interest rates are now at record-low levels and are likely to rise in the future, which could weigh on the price of bonds.
LIQUIDITY AND MARKET RISK
Upon maturity, bonds are redeemed at face or par value, meaning that the bond holder gets his principal back.
But what happens if you sell your bond before it matures?
Be aware that a bond's price will fluctuate with changing market conditions, including the forces of supply and demand in the secondary market.
For instance, if there are not many interested buyers of the particular bond, it means that it is not very liquid and it will be harder for you to sell or that you may have to sell at a loss before maturity.
Mr Menon said: "Poor trading liquidity could be one disadvantage of a bond. Bonds may sometimes not be as actively traded as stocks and this may pose problems for investors who need to sell their bonds urgently.
"If an investor is unable to find a buyer at the price he wants, he may be left with no choice but to sell at the price available, which could result in lower profits or even losses."
RISKS LINKED TO THE BOND'S CONTRACTUAL ARRANGEMENT
A bond is a contractual arrangement between the issuer and the bond holder. The terms and conditions governing each bond can differ significantly, and you should always read and understand the terms carefully before investing in any bond.
In addition, these terms and conditions may change if bond holders agree to alterations proposed by the bond issuer, said MoneySense, the national financial education programme.
One example is the call risk.
Some bonds have a callable feature that gives the issuer the option to buy back or redeem the bond before its maturity date. The issuer may want to do this particularly when opportunities arise for it to refinance at lower interest rates.
However, this may be unfavourable to you as a bond holder because you may not be able to re-invest in a product with equivalent interest payments.
Another example is early redemption risk.
Bonds may come with terms that allow the issuer or the bondholder to redeem the bonds prior to maturity under certain circumstances. You should take note of which party has the right to exercise the option and the circumstances under which it may be exercised.
For instance, the issuer may give itself the right to redeem the bonds before maturity for tax reasons.
Feb 26, 2017
As with most forms of investment, you can lose part or even all of your capital when investing in bonds.
For instance, when an issuer defaults, it is unable to provide regular interest payments or return the original investment amount to the bondholder upon maturity. You as a bondholder may then lose all or a substantial part of your investment. Not all bonds are created equal, so do your own due diligence before applying to buy them.
In a nutshell, the higher interest rates offered by corporates are to compensate the investor for taking on higher risks, which include the credit risk of the issuer (risk of not being repaid if the issuer defaults), liquidity risk (risk of not being able to readily sell the bond and get back your investment proceeds at any time), and market risk (risk that interest-rate movements cause the bond to decrease in value).
Hence, it is prudent when investing to ask what could cause you to lose money and what is the maximum you could lose.
Here are five risk factors that can impact your bond investments.
DEFAULT AND CREDIT RISK
Default risk can change due to broader economic changes or changes in the financial situation of the company or country.
A firm with poor credit fundamentals may go bust or default on its debt and coupon payments, and it is best for investors to be cautious of such companies.
Mr Vasu Menon, OCBC Bank's senior investment strategist, suggests checking out financials such as the firm's debt-to-equity ratio. This measures how much debt an issuer is using to finance its assets and operations.
"It is important to assess if a company is too heavily indebted. A company with too much debt may run into difficulties servicing its debt and may be forced to sell off assets or declare bankruptcy," he added.
"A ratio of less than 0.5 times would be ideal. However, there may be times when a company has a significant cash hoard, strong and positive operating cash flow and good business prospects, in which case, a ratio of more than 0.5 times would still be acceptable.
"However, even for such companies, ideally, the debt-to-equity ratio should not exceed one.
"It may also be advisable to compare the company's debt-to-equity ratio with its peers'. If the ratio is significantly higher, this would be a worrisome sign."
Another way of assessing the firm's financial health is to look at the balance sheet. If the company is suffering from a negative operating cash flow - it is spending more cash than it is generating - or has a low interest coverage ratio of less than 2.5 times, be wary.
POOR CREDIT RATINGS
Note that bond prices are affected by the perceived credit quality or probability of default of the issuer.
This explains why there are advantages to bond issues that have attained credit ratings as they provide a quick, independent and comparable assessment of an issuer's creditworthiness.
Ms Chung Shaw Bee, UOB's head of wealth management for the region and Singapore, said: "The rating is indicative of the issuer's ability to keep up with the expected coupon payment and to return investors' capital upon maturity. However, there are currently a number of bonds that are not rated."
Mr Daryl Liew, co-chair of the Advocacy Committee at CFA Singapore, said: "If the bond has a credit rating, then potential credit-rating downgrades would suggest that something is amiss."
This is why the Monetary Authority of Singapore (MAS) is encouraging bond issuers to obtain credit ratings for their bonds, as the rated issuances will improve transparency in the bond market.
Last November, the regulator announced incentives to offset the costs associated with getting a rating.
"Qualifying Asian issuances will be able to offset up to 50 per cent of one-time issuance costs such as credit-rating fees, international legal fees and arranger fees," the MAS told The Sunday Times. "Even as we draw Asian issuers to Singapore, we want to encourage these issuers to be rated... Rated issuers will be eligible for a larger grant quantum under the Asian Bond Grant."
PRICE AND INTEREST-RATE RISK
A basic relationship that bond investors must note is that interest rates and bond prices move in opposite directions.
So if prevailing interest rates rise, you will likely see a fall in bond prices, and vice versa. If bond prices fall, you could experience a capital loss if you sell the bonds before maturity.
Mr Liew advises that it is important to have an outlook on interest rates when considering bond investing as this could dictate the kind of bonds you would prefer.
"For instance, in a rising interest-rate environment, investors may prefer to stick to shorter-duration bonds or floating-rate bonds," he said.
Mr Menon notes that interest rates are now at record-low levels and are likely to rise in the future, which could weigh on the price of bonds.
LIQUIDITY AND MARKET RISK
Upon maturity, bonds are redeemed at face or par value, meaning that the bond holder gets his principal back.
But what happens if you sell your bond before it matures?
Be aware that a bond's price will fluctuate with changing market conditions, including the forces of supply and demand in the secondary market.
For instance, if there are not many interested buyers of the particular bond, it means that it is not very liquid and it will be harder for you to sell or that you may have to sell at a loss before maturity.
Mr Menon said: "Poor trading liquidity could be one disadvantage of a bond. Bonds may sometimes not be as actively traded as stocks and this may pose problems for investors who need to sell their bonds urgently.
"If an investor is unable to find a buyer at the price he wants, he may be left with no choice but to sell at the price available, which could result in lower profits or even losses."
RISKS LINKED TO THE BOND'S CONTRACTUAL ARRANGEMENT
A bond is a contractual arrangement between the issuer and the bond holder. The terms and conditions governing each bond can differ significantly, and you should always read and understand the terms carefully before investing in any bond.
In addition, these terms and conditions may change if bond holders agree to alterations proposed by the bond issuer, said MoneySense, the national financial education programme.
One example is the call risk.
Some bonds have a callable feature that gives the issuer the option to buy back or redeem the bond before its maturity date. The issuer may want to do this particularly when opportunities arise for it to refinance at lower interest rates.
However, this may be unfavourable to you as a bond holder because you may not be able to re-invest in a product with equivalent interest payments.
Another example is early redemption risk.
Bonds may come with terms that allow the issuer or the bondholder to redeem the bonds prior to maturity under certain circumstances. You should take note of which party has the right to exercise the option and the circumstances under which it may be exercised.
For instance, the issuer may give itself the right to redeem the bonds before maturity for tax reasons.
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.
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.
Lessons on bond investments
Lorna Tan
Feb 26, 2017
Bonds have better yields than bank deposits, are less risky than equities, but risks remain
The investing environment has been in good spirits so far this year, with global share markets hitting fresh highs.
Singapore's benchmark Straits Times Index (STI) is trending above the psychologically significant level of 3,000 points, making the local bourse one of the best-performing markets in the world this year.
This state of euphoria may have led investors to forget the spate of high-yield bond defaults that rocked the market last year, badly affecting investors in the process.
Local banks had their problems as well, with non-performing loans to the offshore and marine sector mounting up.
The Singdollar bond market has suffered five defaults since November 2015, representing $1.1 billion or 0.74 per cent of all bonds outstanding.
Before that, there had been no bond defaults here since 2009, but that changed with the string of collapses led by Trikomsel, then Pacific Andes Resources Development, Swiber, Perisai Petroleum Teknologi and Swissco. It goes to show that no investment, no matter how safe it may seem, is fail-safe.
The Sunday Times highlights some lessons on bond investments.
WHY INVEST IN BONDS?
When you invest in a bond, you are effectively lending money for a period to the issuer - be it the government or a corporate - that issued the bond. In return, bondholders receive a regular stream of interest income, or coupon, throughout the life of the bond.
The coupon payment is usually expressed as a percentage of the principal amount, also known as the face or par value. Upon maturity, bonds are redeemed at face or par value, so the bondholder gets his principal back.
Mr Daryl Liew, co-chair of the Advocacy Committee, CFA Singapore, warns that investors, particularly retail ones, tend to focus on the interest rate or yield of a bond.
"While the yield is important, investors should also consider whether they are being fairly compensated for the risks in lending to the company. In this regard, comparing the bond against a peer group of bonds issued by companies in the same sector with a similar credit profile would be useful.
"Other important factors to consider include the duration of the bond and whether there are any special features in the bonds, like call provisions," he advises.
For instance, bonds from the same issuer with longer tenures tend to provide higher coupon rates. This is to compensate investors for holding them longer as the chance of default rises over time.
Mr Vasu Menon, OCBC Bank's senior investment strategist, says bonds offer investors an opportunity to diversify their investments. They also earn a better yield - through the bond's coupon payouts - than bank deposit rates, which are close to record lows.
"For prudence, investors should always maintain a diversified portfolio with some representation of bonds in their portfolios. Bonds are generally more stable than equities and therefore help to inject stability into an investor's portfolio.
"Most bonds are also... less risky than equities, in that you get the face value of the bond back at maturity if the company does not go bankrupt or default on its obligations.
"In contrast, if the share price of a company falls sharply, it can take a long time before it recovers and, even after many years, it may not recover fully and investors could end up losing a significant part of their initial investments."
BOND PROPORTION
Financial experts say there is no one-size-fits-all formula, as it depends on the individual's asset-allocation strategy based on age, investment horizon, risk appetite, financial situation and investment goals.
Mr Lim Say Boon, DBS Bank's chief investment officer, says: "For our medium risk appetite/tolerance clients - balanced investors - we recommend 30 per cent in bonds, 54 per cent in stocks.
"But for our highest risk appetite/tolerance clients - aggressive investors - we recommend only 3 per cent in bonds, 89 per cent in equities.
"The lowest risk tolerance clients - defensive investors - will hold more cash than bonds, 65 per cent for cash/money market instruments versus 35 per cent for bonds, reflecting the credit and liquidity risks of bonds."
Mr Lim Soon Chong, regional head of investment products and advisory at DBS, notes that the Singdollar retail bond market is still too small to support the needs of all investors and the external ratings culture is also not well entrenched.
"For these reasons, we think the best approach for most individual investors - including affluent and individual retail investors here - is to invest in fixed-income collective investment schemes, for example, fixed-income mutual funds," he says. "These collective investment schemes tend to invest in a diversified pool of fixed-income securities and tend to offer better liquidity than individual bond investments."
Feb 26, 2017
Bonds have better yields than bank deposits, are less risky than equities, but risks remain
The investing environment has been in good spirits so far this year, with global share markets hitting fresh highs.
Singapore's benchmark Straits Times Index (STI) is trending above the psychologically significant level of 3,000 points, making the local bourse one of the best-performing markets in the world this year.
This state of euphoria may have led investors to forget the spate of high-yield bond defaults that rocked the market last year, badly affecting investors in the process.
Local banks had their problems as well, with non-performing loans to the offshore and marine sector mounting up.
The Singdollar bond market has suffered five defaults since November 2015, representing $1.1 billion or 0.74 per cent of all bonds outstanding.
Before that, there had been no bond defaults here since 2009, but that changed with the string of collapses led by Trikomsel, then Pacific Andes Resources Development, Swiber, Perisai Petroleum Teknologi and Swissco. It goes to show that no investment, no matter how safe it may seem, is fail-safe.
The Sunday Times highlights some lessons on bond investments.
WHY INVEST IN BONDS?
When you invest in a bond, you are effectively lending money for a period to the issuer - be it the government or a corporate - that issued the bond. In return, bondholders receive a regular stream of interest income, or coupon, throughout the life of the bond.
The coupon payment is usually expressed as a percentage of the principal amount, also known as the face or par value. Upon maturity, bonds are redeemed at face or par value, so the bondholder gets his principal back.
Mr Daryl Liew, co-chair of the Advocacy Committee, CFA Singapore, warns that investors, particularly retail ones, tend to focus on the interest rate or yield of a bond.
"While the yield is important, investors should also consider whether they are being fairly compensated for the risks in lending to the company. In this regard, comparing the bond against a peer group of bonds issued by companies in the same sector with a similar credit profile would be useful.
"Other important factors to consider include the duration of the bond and whether there are any special features in the bonds, like call provisions," he advises.
For instance, bonds from the same issuer with longer tenures tend to provide higher coupon rates. This is to compensate investors for holding them longer as the chance of default rises over time.
Mr Vasu Menon, OCBC Bank's senior investment strategist, says bonds offer investors an opportunity to diversify their investments. They also earn a better yield - through the bond's coupon payouts - than bank deposit rates, which are close to record lows.
"For prudence, investors should always maintain a diversified portfolio with some representation of bonds in their portfolios. Bonds are generally more stable than equities and therefore help to inject stability into an investor's portfolio.
"Most bonds are also... less risky than equities, in that you get the face value of the bond back at maturity if the company does not go bankrupt or default on its obligations.
"In contrast, if the share price of a company falls sharply, it can take a long time before it recovers and, even after many years, it may not recover fully and investors could end up losing a significant part of their initial investments."
BOND PROPORTION
Financial experts say there is no one-size-fits-all formula, as it depends on the individual's asset-allocation strategy based on age, investment horizon, risk appetite, financial situation and investment goals.
Mr Lim Say Boon, DBS Bank's chief investment officer, says: "For our medium risk appetite/tolerance clients - balanced investors - we recommend 30 per cent in bonds, 54 per cent in stocks.
"But for our highest risk appetite/tolerance clients - aggressive investors - we recommend only 3 per cent in bonds, 89 per cent in equities.
"The lowest risk tolerance clients - defensive investors - will hold more cash than bonds, 65 per cent for cash/money market instruments versus 35 per cent for bonds, reflecting the credit and liquidity risks of bonds."
Mr Lim Soon Chong, regional head of investment products and advisory at DBS, notes that the Singdollar retail bond market is still too small to support the needs of all investors and the external ratings culture is also not well entrenched.
"For these reasons, we think the best approach for most individual investors - including affluent and individual retail investors here - is to invest in fixed-income collective investment schemes, for example, fixed-income mutual funds," he says. "These collective investment schemes tend to invest in a diversified pool of fixed-income securities and tend to offer better liquidity than individual bond investments."
Monday, May 23, 2016
More about bonds
Dr Larry Haverkamp
The Sunday Times
2016.05.22
There are two ways that companies and governments borrow. One is to use banks and the other is to use bonds, which is a way to borrow from whoever buys the bonds.
Do investors get a good deal? Yes. Over time, bonds pay less than stocks and property. But the return is predictable, plus bonds are the best way to reduce volatility when you add them to any portfolio.
We talked about debt last week, but we skipped over a key question: Which is best, an individual bond or a bond fund? The difference is huge, especially since interest rates are (probably) about to rise.
That is the question. What is the answer?
As you may have guessed: "It depends." On what? Mostly on your preferences. and to a lesser extent, on how much you invest. As for where to buy, you have the usual choice of a bank or a stock broker.
INDIVIDUAL BONDS
The advantage of buying an individual bond is it is one of the few investments where it is nearly impossible to lose money. That is because bonds are almost certain to pay all interest due, plus principal. Where else can you be so sure of getting a steady return and not lose your principal?
True, you could lose money if the firm went broke but it is easy to handle. Simply invest in investment-grade bonds and avoid the risky ones, called junk bonds. But these have benefits of their own since the risk makes them almost like stocks, with high risks and returns.
A second danger is if the ratings are wrong. It is rare but can happen, like when a new type of bond received too high a rating from Moody's, S&P and Fitch. This was highly misleading and in 2008, it contributed to the US housing market failure as well as the worldwide recession.
Fundamental to bonds is the inverse relation between a bond's prices and market interest rates. It only happens with bonds and the rule is: When market rates rise. bond prices fall and vice versa.
Now, imagine market rates rise, as expected, over the next two or three years and, as just explained, bond prices fall. Does it mean you will suffer a loss?
Yes. it certainly does. But the good news is it is temporary, which makes it loss-free if you simply hold the bond and wait until it matures, like in one, two, five,10 or 20 years.
If you don't sell. the loss is a paper one. also called an opportunity loss. It becomes real only if the bond price falls and you sell. Hold on, and you can be confident of getting your money back since the company must repay its debts or bondholders can force it into bankruptcy.
It is almost certain to pay in full if it is an investment grade bond, which is ranked BBB or higher by Standard and Poor's. But what about unranked bonds? Ah, that is another problem for another day.
The rule I just explained about repayment of principal supersedes all others, including the rule that high interest rates bring down bond prices. Think of those lower prices as a temporary effect. By maturity, the bonds will have risen to repay the full amount borrowed, called the face value or par value.
What a deal! There is no other investment where you will get back your money plus interest with almost no chance of loss.
THE ALTERNATIVE: FUNDS
Now for an equally popular choice: Bond funds. What makes them opposite from individual bonds is they are continuous. When one bond matures, the fund takes the money it receives and buys another.
But if interest rates have risen, the new bond will be priced lower and that lowers the fund's price. It is similar to the stock market opening "gap down" from the previous day's close. Of course, it can work the other way too. If market rates fall, bond prices will rise and fund owners will enjoy a capital gain, which they can sell at a profit.
More important than the fall in price is the higher yield the fund will earn when interest rates rise. This turns out to be dominant. so the net effect from falling prices and rising yields is positive, as is expected to happen soon.
An important advantage of funds is they hold multiple bonds, which provides diversification. That is especially useful for high-yield and risky bonds, like junk bonds, where a few may fail but you don't know which.
It is also beneficial as a way to get bonds that you probably can't buy on your own like certain junk bonds, emerging market bonds and convertible bonds. You usually find these in an ETF rather than a bond fund.
As for costs, it is a drawback for bond funds and even for the famously cheap ETFs. That is because both charge annual expense ratios while individual bonds do not.
So which is best? Well, it is like asking: "Which is better, vanilla or chocolate ice cream?" Of course, that is a matter of individual preference, just like the choice between an individual bond versus a bond fund versus a bond ETF.
A rule of thumb is to buy a fund or ETF if you invest less than $100.000 and buy individual bonds if you invest more than $100,000. But it is a rough guide and most people simply follow their preference.
-----------------
lhaverkamp@smu.edu.sg
An adjunct professor at SMU, Dr Haverkamp contributes this column weekly to help our readers understand money matters better
The Sunday Times
2016.05.22
There are two ways that companies and governments borrow. One is to use banks and the other is to use bonds, which is a way to borrow from whoever buys the bonds.
Do investors get a good deal? Yes. Over time, bonds pay less than stocks and property. But the return is predictable, plus bonds are the best way to reduce volatility when you add them to any portfolio.
We talked about debt last week, but we skipped over a key question: Which is best, an individual bond or a bond fund? The difference is huge, especially since interest rates are (probably) about to rise.
That is the question. What is the answer?
As you may have guessed: "It depends." On what? Mostly on your preferences. and to a lesser extent, on how much you invest. As for where to buy, you have the usual choice of a bank or a stock broker.
INDIVIDUAL BONDS
The advantage of buying an individual bond is it is one of the few investments where it is nearly impossible to lose money. That is because bonds are almost certain to pay all interest due, plus principal. Where else can you be so sure of getting a steady return and not lose your principal?
True, you could lose money if the firm went broke but it is easy to handle. Simply invest in investment-grade bonds and avoid the risky ones, called junk bonds. But these have benefits of their own since the risk makes them almost like stocks, with high risks and returns.
A second danger is if the ratings are wrong. It is rare but can happen, like when a new type of bond received too high a rating from Moody's, S&P and Fitch. This was highly misleading and in 2008, it contributed to the US housing market failure as well as the worldwide recession.
Fundamental to bonds is the inverse relation between a bond's prices and market interest rates. It only happens with bonds and the rule is: When market rates rise. bond prices fall and vice versa.
Now, imagine market rates rise, as expected, over the next two or three years and, as just explained, bond prices fall. Does it mean you will suffer a loss?
Yes. it certainly does. But the good news is it is temporary, which makes it loss-free if you simply hold the bond and wait until it matures, like in one, two, five,10 or 20 years.
If you don't sell. the loss is a paper one. also called an opportunity loss. It becomes real only if the bond price falls and you sell. Hold on, and you can be confident of getting your money back since the company must repay its debts or bondholders can force it into bankruptcy.
It is almost certain to pay in full if it is an investment grade bond, which is ranked BBB or higher by Standard and Poor's. But what about unranked bonds? Ah, that is another problem for another day.
The rule I just explained about repayment of principal supersedes all others, including the rule that high interest rates bring down bond prices. Think of those lower prices as a temporary effect. By maturity, the bonds will have risen to repay the full amount borrowed, called the face value or par value.
What a deal! There is no other investment where you will get back your money plus interest with almost no chance of loss.
THE ALTERNATIVE: FUNDS
Now for an equally popular choice: Bond funds. What makes them opposite from individual bonds is they are continuous. When one bond matures, the fund takes the money it receives and buys another.
But if interest rates have risen, the new bond will be priced lower and that lowers the fund's price. It is similar to the stock market opening "gap down" from the previous day's close. Of course, it can work the other way too. If market rates fall, bond prices will rise and fund owners will enjoy a capital gain, which they can sell at a profit.
More important than the fall in price is the higher yield the fund will earn when interest rates rise. This turns out to be dominant. so the net effect from falling prices and rising yields is positive, as is expected to happen soon.
An important advantage of funds is they hold multiple bonds, which provides diversification. That is especially useful for high-yield and risky bonds, like junk bonds, where a few may fail but you don't know which.
It is also beneficial as a way to get bonds that you probably can't buy on your own like certain junk bonds, emerging market bonds and convertible bonds. You usually find these in an ETF rather than a bond fund.
As for costs, it is a drawback for bond funds and even for the famously cheap ETFs. That is because both charge annual expense ratios while individual bonds do not.
So which is best? Well, it is like asking: "Which is better, vanilla or chocolate ice cream?" Of course, that is a matter of individual preference, just like the choice between an individual bond versus a bond fund versus a bond ETF.
A rule of thumb is to buy a fund or ETF if you invest less than $100.000 and buy individual bonds if you invest more than $100,000. But it is a rough guide and most people simply follow their preference.
-----------------
lhaverkamp@smu.edu.sg
An adjunct professor at SMU, Dr Haverkamp contributes this column weekly to help our readers understand money matters better
Monday, October 14, 2013
The big picture about bonds
The Business Times
Cai Haoxiang
14/10/2013
A FRIEND, upset at how his mother was sold a financial product, recently told me this story.
His mum was convinced by her banker to buy a complex product which involved the bonds of four foreign companies with coupons ranging from 3 to 5 per cent.
Now, 3 to 5 per cent sounds good. But if she knew how bonds worked, she would have asked what the yield of the bonds were.
In this case, her banker did not mention yields at all. Worse still, the product sold was just a derivative on the underlying bonds. The buyer has no legal ownership of the underlying bonds.
My friend cancelled the deal immediately upon finding out. It was unclear what kinds of gains could have come out of it. But it was clear that the bank would make a spread from selling such a product. The banker would make a nice commission. Meanwhile, the risks to the client are complex and might not justify the gains promised.
How do coupons factor into bond pricing? Are higher coupons good?
Before we answer these questions, we have to first understand how bond prices are affected by a major item: interest rates.
The inverse relation
If the US government defaults on its sovereign debt obligations in the coming weeks by failing to raise its debt ceiling, one of the first and most serious consequences will be a rise in interest rates.
This will happen if US Treasuries, previously thought to be the safest asset in the world, face a sell-off.
When investors are not willing to pay as much to lend money to the US government, the US government will need to pay a comparatively higher interest on the bonds it issues to attract investors back.
New bonds will thus yield more for investors. While this can be seen as a good thing, this situation arises because the investors are taking more risk. They are signing up to lend money for a long period of time to a government that might not be able to borrow more to pay them back.
The first relationship in the bond world that beginners learn is the inverse relationship between prices and yields.
When prices fall, yields go up. When prices rise, yields come down.
This can be hard to understand at first. Falling prices is not a good thing for the owners of any asset. So why then do falling prices come with improving yields - which is a good thing?
To figure this out, you have to decide whether you are a bondholder or a potential bond buyer. If you currently own bonds, then falling prices does not seem good because if you really need to sell your investment, you can get less for it.
But falling prices, which are caused by rising interest rates, should not bother you if you have money to reinvest.
After all, you have locked in some gains by buying the bond. You will keep receiving interest payments until the end of the bond's term, by which you will then get the original value of the bond, known as the par value, together with the final interest payment.
If interest rates rise, it just means that your current investment, locked in at an earlier yield, isn't as attractive compared to others now. You won't lose money if you don't sell the bond, assuming the government or company you lent money to does not go bankrupt.
Rather, you can invest more money in bonds at a better yield, now that interest rates are higher.
So while falling bond prices mean that you are sitting on a paper loss, you need not realise the loss, but can continue to hold the bond till maturity and collect the originally agreed-upon interest payments. Most people hold bonds to maturity and are not bothered by fluctuations in between.
Meanwhile, the higher yields that bonds are trading at, given higher interest rates, mean that you can lock in better returns on current investments as a potential bond buyer.
Similarly, rising bond prices are not a good sign for potential bond buyers, for this means that they are not able to get as good a yield on their investments.
But for current bondholders, this means they can sell their bonds for a profit, and reinvest the money elsewhere for hopefully better returns.
Coupons aren't everything
Now we bring in a common feature of bonds that confuse people: coupons.
Coupons refer to the interest payments that issuers of bonds give out, usually twice a year.
For simplicity, we will assume these payments are made once a year. Obviously, the larger the coupons are, the more one would pay for the bond. But if one has to pay a higher price, the bond is not as attractive.
A similar logic applies to how this bond is actually priced.
Let's say a company plans to issue a bond that pays a 10 per cent coupon out of every $1,000 lent to the company. It will borrow $1,000 for 20 years. The $1,000 here is called the face or par value of the bond. This represents the sum of money that the company will repay the investor at the end of the borrowing period.
At a 10 per cent coupon rate, an investor that holds this bond will get $100 every year (10 per cent of $1,000) for 20 years. At the end of the 20th year, he will get the final $100 coupon payment together with the $1,000 face value.
Without even going into the calculations, we can see an investor will get $2,000 worth of coupon payments over the lifetime of this bond.
A 10 per cent coupon thus sounds like a great deal. Right?
Here's the catch.
It usually will not cost an investor only $1,000 to buy this particular bond.
If prevailing interest rates were lower than 10 per cent, a bond with this 10 per cent coupon becomes very attractive. Investors would be willing to pay more to buy it.
The bond's price would typically adjust instantly to a price higher than $1,000. It will trade at a premium.
It will cost an investor way more than $1,000 to get hold of this stream of interest payments of $100 a year.
In fact, if such a deal came out today, and interest rates are 3 per cent - meaning that investors can only get a yield of 3 per cent in the market - this 20-year bond with a 10 per cent coupon will actually cost the investor $2,041 to purchase!
There is no way that the investor can get a yield of more than 3 per cent if 3 per cent was the prevailing interest rate. All bonds issued will lock in a yield of 3 per cent. If their coupons give a higher rate, their prices will automatically adjust upwards.
Thus, it is more accurate to say that investors are willing to pay $2,041 to get a cash flow of $100 a year for the next 20 years, getting back $1,000 in the final year, to get a yield of 3 per cent. This also assumes coupons are reinvested at 3 per cent. Getting the number $2,041 requires a financial calculator. You need to put in the coupon payments every year ($100), the number of years (20), the expected "future value" at the end ($1,000), and the expected interest rate or yield (3 per cent), before computing the "present value" to find out what this stream of payments is worth today.
The 10 per cent coupon rate is not as useful here.
Thus investors have to be wary of only being quoted the coupon rate. They have to ask what the yield of the bond actually is.
Larger coupons lead to lower price volatility
Larger coupons, however, are still useful to have. This is because having a larger stream of regular payments will be a comfort to investors if interest rates change suddenly.
If interest rates change, the prices of bonds with smaller coupons or no coupons will change the most dramatically.
Let's take the example of the previous 20-year $1,000 bond with a 10 per cent coupon, that was issued when interest rates were at 3 per cent.
Once bonds are issued, bond prices will depend on how many coupon payments are left, as well as the interest rate investors can get on other investments.
Ten years in, halfway through the life of the bond, ten $100 payments will have already been made. If interest rates are still at 3 per cent, meaning that investors still expect to yield 3 per cent from similar bond investments, this bond will be worth $1,597.
Now, let us say interest rates spike to 6 per cent. The value of this bond will drop to $1,294 - a 19 per cent drop. If the coupon was just $50 a year, meaning an original coupon rate of 5 per cent, the equivalent price drop will be from $1,171 to $926 - a larger 21 per cent drop.
If the coupon was even smaller, say $20 a year, the price drop will be 23 per cent.
Looking at the yield of a bond is important when buying them, more so than the coupon rate. But in this case, being paid a larger $100 coupon helped cushion the negative price effects of an interest rate spike.
Again, if you don't plan to sell your bond before maturity, this would not make a difference. You would just buy new bonds at higher current yields.
Other effects on bond prices
A lower interest rate environment means more volatile bond prices if there is a rate hike.
If current yields are at 3 per cent, and there is a three percentage-point shock upwards, the bond price of a $1,000 10-year bond paying $50 annual coupons would fall by 21 per cent. If current yields were far lower, at 0.5 per cent, and there was a similar shock to 3.5 per cent, prices would fall by more, 22 per cent to be exact.
This is why the current low interest rate environment means bonds are risky to hold if one plans to sell them at some point.
Another factor that affects the sensitivity of bond prices is the length of time before the maturity of the bond.
If the bond has a long maturity date, meaning there are a lot of interest payments to be made, a change in interest rates would result in a sharper movement in prices.
For example, if the above example of a $50 coupon and 3 per cent yield applied to a 30-year bond, prices would fall by 38 per cent if interest rates spiked 3 percentage points up, higher than the 21 per cent fall for a 10-year bond.
To conclude, coupon rates, interest rate changes, length of maturity and the current interest rate environment all have effects on bond prices.
To measure the sensitivity of the price of a bond to interest rate changes given all these factors, investors use a calculation known as duration. We will discuss this in a future piece.
Cai Haoxiang
14/10/2013
A FRIEND, upset at how his mother was sold a financial product, recently told me this story.
His mum was convinced by her banker to buy a complex product which involved the bonds of four foreign companies with coupons ranging from 3 to 5 per cent.
Now, 3 to 5 per cent sounds good. But if she knew how bonds worked, she would have asked what the yield of the bonds were.
In this case, her banker did not mention yields at all. Worse still, the product sold was just a derivative on the underlying bonds. The buyer has no legal ownership of the underlying bonds.
My friend cancelled the deal immediately upon finding out. It was unclear what kinds of gains could have come out of it. But it was clear that the bank would make a spread from selling such a product. The banker would make a nice commission. Meanwhile, the risks to the client are complex and might not justify the gains promised.
How do coupons factor into bond pricing? Are higher coupons good?
Before we answer these questions, we have to first understand how bond prices are affected by a major item: interest rates.
The inverse relation
If the US government defaults on its sovereign debt obligations in the coming weeks by failing to raise its debt ceiling, one of the first and most serious consequences will be a rise in interest rates.
This will happen if US Treasuries, previously thought to be the safest asset in the world, face a sell-off.
When investors are not willing to pay as much to lend money to the US government, the US government will need to pay a comparatively higher interest on the bonds it issues to attract investors back.
New bonds will thus yield more for investors. While this can be seen as a good thing, this situation arises because the investors are taking more risk. They are signing up to lend money for a long period of time to a government that might not be able to borrow more to pay them back.
The first relationship in the bond world that beginners learn is the inverse relationship between prices and yields.
When prices fall, yields go up. When prices rise, yields come down.
This can be hard to understand at first. Falling prices is not a good thing for the owners of any asset. So why then do falling prices come with improving yields - which is a good thing?
To figure this out, you have to decide whether you are a bondholder or a potential bond buyer. If you currently own bonds, then falling prices does not seem good because if you really need to sell your investment, you can get less for it.
But falling prices, which are caused by rising interest rates, should not bother you if you have money to reinvest.
After all, you have locked in some gains by buying the bond. You will keep receiving interest payments until the end of the bond's term, by which you will then get the original value of the bond, known as the par value, together with the final interest payment.
If interest rates rise, it just means that your current investment, locked in at an earlier yield, isn't as attractive compared to others now. You won't lose money if you don't sell the bond, assuming the government or company you lent money to does not go bankrupt.
Rather, you can invest more money in bonds at a better yield, now that interest rates are higher.
So while falling bond prices mean that you are sitting on a paper loss, you need not realise the loss, but can continue to hold the bond till maturity and collect the originally agreed-upon interest payments. Most people hold bonds to maturity and are not bothered by fluctuations in between.
Meanwhile, the higher yields that bonds are trading at, given higher interest rates, mean that you can lock in better returns on current investments as a potential bond buyer.
Similarly, rising bond prices are not a good sign for potential bond buyers, for this means that they are not able to get as good a yield on their investments.
But for current bondholders, this means they can sell their bonds for a profit, and reinvest the money elsewhere for hopefully better returns.
Coupons aren't everything
Now we bring in a common feature of bonds that confuse people: coupons.
Coupons refer to the interest payments that issuers of bonds give out, usually twice a year.
For simplicity, we will assume these payments are made once a year. Obviously, the larger the coupons are, the more one would pay for the bond. But if one has to pay a higher price, the bond is not as attractive.
A similar logic applies to how this bond is actually priced.
Let's say a company plans to issue a bond that pays a 10 per cent coupon out of every $1,000 lent to the company. It will borrow $1,000 for 20 years. The $1,000 here is called the face or par value of the bond. This represents the sum of money that the company will repay the investor at the end of the borrowing period.
At a 10 per cent coupon rate, an investor that holds this bond will get $100 every year (10 per cent of $1,000) for 20 years. At the end of the 20th year, he will get the final $100 coupon payment together with the $1,000 face value.
Without even going into the calculations, we can see an investor will get $2,000 worth of coupon payments over the lifetime of this bond.
A 10 per cent coupon thus sounds like a great deal. Right?
Here's the catch.
It usually will not cost an investor only $1,000 to buy this particular bond.
If prevailing interest rates were lower than 10 per cent, a bond with this 10 per cent coupon becomes very attractive. Investors would be willing to pay more to buy it.
The bond's price would typically adjust instantly to a price higher than $1,000. It will trade at a premium.
It will cost an investor way more than $1,000 to get hold of this stream of interest payments of $100 a year.
In fact, if such a deal came out today, and interest rates are 3 per cent - meaning that investors can only get a yield of 3 per cent in the market - this 20-year bond with a 10 per cent coupon will actually cost the investor $2,041 to purchase!
There is no way that the investor can get a yield of more than 3 per cent if 3 per cent was the prevailing interest rate. All bonds issued will lock in a yield of 3 per cent. If their coupons give a higher rate, their prices will automatically adjust upwards.
Thus, it is more accurate to say that investors are willing to pay $2,041 to get a cash flow of $100 a year for the next 20 years, getting back $1,000 in the final year, to get a yield of 3 per cent. This also assumes coupons are reinvested at 3 per cent. Getting the number $2,041 requires a financial calculator. You need to put in the coupon payments every year ($100), the number of years (20), the expected "future value" at the end ($1,000), and the expected interest rate or yield (3 per cent), before computing the "present value" to find out what this stream of payments is worth today.
The 10 per cent coupon rate is not as useful here.
Thus investors have to be wary of only being quoted the coupon rate. They have to ask what the yield of the bond actually is.
Larger coupons lead to lower price volatility
Larger coupons, however, are still useful to have. This is because having a larger stream of regular payments will be a comfort to investors if interest rates change suddenly.
If interest rates change, the prices of bonds with smaller coupons or no coupons will change the most dramatically.
Let's take the example of the previous 20-year $1,000 bond with a 10 per cent coupon, that was issued when interest rates were at 3 per cent.
Once bonds are issued, bond prices will depend on how many coupon payments are left, as well as the interest rate investors can get on other investments.
Ten years in, halfway through the life of the bond, ten $100 payments will have already been made. If interest rates are still at 3 per cent, meaning that investors still expect to yield 3 per cent from similar bond investments, this bond will be worth $1,597.
Now, let us say interest rates spike to 6 per cent. The value of this bond will drop to $1,294 - a 19 per cent drop. If the coupon was just $50 a year, meaning an original coupon rate of 5 per cent, the equivalent price drop will be from $1,171 to $926 - a larger 21 per cent drop.
If the coupon was even smaller, say $20 a year, the price drop will be 23 per cent.
Looking at the yield of a bond is important when buying them, more so than the coupon rate. But in this case, being paid a larger $100 coupon helped cushion the negative price effects of an interest rate spike.
Again, if you don't plan to sell your bond before maturity, this would not make a difference. You would just buy new bonds at higher current yields.
Other effects on bond prices
A lower interest rate environment means more volatile bond prices if there is a rate hike.
If current yields are at 3 per cent, and there is a three percentage-point shock upwards, the bond price of a $1,000 10-year bond paying $50 annual coupons would fall by 21 per cent. If current yields were far lower, at 0.5 per cent, and there was a similar shock to 3.5 per cent, prices would fall by more, 22 per cent to be exact.
This is why the current low interest rate environment means bonds are risky to hold if one plans to sell them at some point.
Another factor that affects the sensitivity of bond prices is the length of time before the maturity of the bond.
If the bond has a long maturity date, meaning there are a lot of interest payments to be made, a change in interest rates would result in a sharper movement in prices.
For example, if the above example of a $50 coupon and 3 per cent yield applied to a 30-year bond, prices would fall by 38 per cent if interest rates spiked 3 percentage points up, higher than the 21 per cent fall for a 10-year bond.
To conclude, coupon rates, interest rate changes, length of maturity and the current interest rate environment all have effects on bond prices.
To measure the sensitivity of the price of a bond to interest rate changes given all these factors, investors use a calculation known as duration. We will discuss this in a future piece.
Monday, September 9, 2013
Introduction to bond investing
The Business Times
Cai Haoxiang
9/9/2013
ONE month ago, as Singapore celebrated its National Day, Japan celebrated a dubious national milestone.
On Aug 9, 2013, the Japanese finance ministry announced that total Japanese government debt as at end-June was over 1,000 trillion yen, or 1,000,000,000,000,000 yen.
One quadrillion yen translates to $12.8 trillion in Singapore dollar terms, or $12,800 billion. The size of Singapore's economy was just $350 billion last year. Japan's government thus owes money to the tune of 37 Singapores. This astronomical sum was more than twice the size of Japan's own economy, which was already the third largest in the world.
Add in total corporate and private debt, and total Japanese debt is 500 per cent of its gross domestic product (GDP), or more than 2,000 trillion yen.
By contrast, the total market capitalisation of the Tokyo Stock Exchange was just 400 trillion yen at end-August.
Debt is obviously a big deal, and this is also reflected in global financial markets.
The news might tend to be dominated by stock market movements, but the movements in the bond markets have a potentially weightier impact.
According to a 2011 report by consultancy McKinsey, the world's stock of equity and debt amounted to US$212 trillion in 2010. Stock market capitalisation amounted to just a little over a quarter, or US$54 trillion. The remainder consisted of debt: bonds issued by corporations, financial institutions, governments; asset-backed securities; and bank loans held on balance sheets. Government debt amounted to 69 per cent of world GDP.
Since the global financial crisis, money has flowed into debt markets as governments borrowed to fund stimulus programmes or to boost confidence in the economy, and investors fled to the relative safety of high-quality debt securities.
Among the very rich, a popular way to mint money in a low interest rate environment was to borrow from banks at a lower rate, say 3 per cent, and buy bonds yielding a higher rate, say 6 per cent. Assuming the bonds did not go into default, which would seldom happen if they bought investment-grade bonds, and assuming the lengths of both the bank loans and bonds were matched, the trades were extremely profitable at a very low risk.
But what exactly are bonds? And how do you go about bond investing?
This article gives the briefest glimpse of the world of bonds, otherwise known as debt or fixed income securities. I will focus on the simplest type of bonds, and leave the discussion of perpetuals, callable or putable bonds, convertible bonds, preference shares, mortgage-backed securities and asset-backed securities for another day.
The gist is this: Bonds are a way for companies and governments to borrow money from investors for a fixed period of time over the long term.
From the investor's point of view, bonds are generally regarded as less risky. However, they usually have to settle for lower returns. And in an environment of potentially rising interest rates as the US Federal Reserve gradually stops pumping so much liquidity into the financial system, bonds are not a recommended investment for investors who intend to sell their bonds before they are due.
How to buy bonds
I will tackle the investing question first before going into detail on the nature of bonds.
There are two ways of investing in bonds: buying the individual bond, and buying units in a bond fund.
Buying individual bonds is typically not done by the retail investor due to the large commitment required per bond, which can be $250,000 a lot. But there are a couple of options.
Singapore government bonds, for example, can be bought through an ATM machine or Internet banking platform. The minimum investment is $1,000, and people buy in multiples of $1,000.
Some bonds are also traded on the Singapore Exchange. These are known as retail bonds. There are 10 retail bonds out on the market, issued by companies such as Singapore Airlines (SIA), Olam, Genting, CapitaMalls Asia, United Engineers, and Tiger Airways.
The minimum investment required for retail bonds is typically relatively low. In 2010, SIA was the first listed company to set aside a portion of its corporate bonds for retail investors, with a minimum subscription of $10,000.
The largest amount of debt sold to investors here happened last year, when casino operator Genting made a $1.8 billion perpetual bond issue, with another $500 million of perpetuals targeted at retail investors with a minimum subscription of $5,000.
But the main portion of the bond market is traded by institutions and high net worth individuals in the over-the-counter (OTC) market, that is, not publicly in any formal exchange. To buy them, investors go through banks or through a broker. Bond professionals, however, recommend that retail investors invest in bond funds instead. These funds invest money in a variety of bonds. This is to spread out the risk, in case the company you lent money to goes belly-up. Bond funds are typically more liquid. This means they are traded more frequently, so it is easier to buy and sell at a fairer price.
There are numerous bond funds catering to bonds across different countries, geographical regions, and companies. They can be bought through the Central Provident Fund (CPF) Investment Scheme, through fund providers such as Fidelity, Vanguard and BlackRock, and offered indirectly or directly in products by insurance companies and banks.
There are a few bond funds tradeable on SGX. The ABF Singapore Bond Index Fund is one such investment. It is an exchange-traded fund (ETF) run by Nikko Asset Management, and gives investors exposure to Singapore government bonds. Its last traded price was $1.1320 a unit, and the lot size is 1,000 units a lot. The fund distributes dividends once a year. Its last distribution was announced at end-September 2012, of $0.0128 per unit, giving a yield of 1.1 per cent.
What are bonds?
Bonds are essentially a contract between a borrower and a lender.
The lender agrees to lend a sum of money to the borrower for a fixed period of time for a year or more.
In return, the borrower typically promises to pay the lender interest payments every six months, to compensate the lender for parting with the money. These payments are known as coupons.
Coupons are called thus because bonds used to be issued to investors in the form of engraved certificates. The bonds would come with multiple coupons that represented the interest payments. When they become due, say on June 30 or Dec 31, the owner would clip the relevant coupon and bring it to a bank to exchange for money. At the end of the borrowing period, the borrower will give the entire sum borrowed back to the lender, together with the final coupon payment.
This process is automated now, but the old name stuck.
If the borrower cannot pay interest payments or pay back the original sum it borrowed, it will be in default. This is a technical term that means the borrower has not met its legal obligations according to its debt contract.
The lower the credit rating of the borrower, known as the bond issuer, the higher the chance of default.
Credit rating agencies such as Moody's, S&P and Fitch are companies that help investors assess the likelihood of failure. They classify bonds into various grades, akin to the grades you get in school.
The top four grades, AAA, AA, A, and BBB (Baa for Moody's), are known as investment grade bonds. Typically, these are bonds that banks and financial institutions invest in, because these borrowers are judged to have a low enough risk.
Issuers with strong balance sheets and mature businesses tend to get rated higher. By having a higher rating, they do not need to pay investors as much interest. The yield of investment grade bonds tend to be low, say 2-3 per cent a year.
Bonds below investment grade, such as BB, B, or C-rated bonds, are considered speculative grade. These bonds are also known as junk bonds, or high-yield bonds. These companies are assessed to be riskier to invest in and lend money to, and often have to pay investors a higher interest rate, say 7 per cent or more. There is an advantage to buying the bonds of a risky company compared to buying its stock, however.
In the event of default, bondholders get paid first as a company's assets get liquidated. Stockholders are often left with nothing after that.
The bond investor also seldom loses everything even if the company defaults. A study by Moody's on 1,100 defaulting North American bond issuers from 1983 to 2003 found the average recovery rate to be 39.5 per cent, and the median, 36.6 per cent.
Bond jargon
The bond world, unfortunately, is rife with jargon. This can make it difficult for the layman investor to understand how bonds work.
The exact mechanics of bond pricing will be explained in a future piece.
But the most important thing investors should be careful of is the percentages bandied around by bond professionals.
A bond typically pays a fixed coupon rate on its face value, the amount that the issuer has to pay back upon the end of the borrowing period.
For example, an issuer might borrow $1,000 from investors with a coupon rate of 5 per cent, for a period of 10 years. This means coupon payments are $50 a year, or $25 every half-year.
There will be a total of 20 half-year payments of $25, before the investor gets back $1,000 at the end of 10 years.
But the price of the bond, or the cost to investors who buy when the bond is first issued, might not be $1,000.
It will only be $1,000 when market interest rates equal the coupon rate. If interest rates are at 5 per cent and the bond offers a coupon of 5 per cent, the market is indifferent to investing $1,000 to get $25 a half-year either in the bond, or elsewhere. Thus it is willing to pay $1,000 for this 5 per cent coupon, 10 year bond.
But if one year later, general interest rates rise to, say, 6 per cent, the market can now get more money by investing in another instrument. Demand for this bond will fall.
The price of this bond will also fall to $931.23 - even though it will continue to pay out $25 every half-year for the next nine years, and will pay $1,000 when it matures.
If investors need to sell the bond instead of holding it till maturity, they will suffer a loss.
The coupon yield, current yield and yield to maturity of a bond can all be different. Investors need to pay the greatest attention to the bond's yield to maturity, which is the bond's total return at the moment when the investor is looking at it.
Yield to maturity is the common understanding of what a bond's yield is.
Cai Haoxiang
9/9/2013
ONE month ago, as Singapore celebrated its National Day, Japan celebrated a dubious national milestone.
On Aug 9, 2013, the Japanese finance ministry announced that total Japanese government debt as at end-June was over 1,000 trillion yen, or 1,000,000,000,000,000 yen.
One quadrillion yen translates to $12.8 trillion in Singapore dollar terms, or $12,800 billion. The size of Singapore's economy was just $350 billion last year. Japan's government thus owes money to the tune of 37 Singapores. This astronomical sum was more than twice the size of Japan's own economy, which was already the third largest in the world.
Add in total corporate and private debt, and total Japanese debt is 500 per cent of its gross domestic product (GDP), or more than 2,000 trillion yen.
By contrast, the total market capitalisation of the Tokyo Stock Exchange was just 400 trillion yen at end-August.
Debt is obviously a big deal, and this is also reflected in global financial markets.
The news might tend to be dominated by stock market movements, but the movements in the bond markets have a potentially weightier impact.
According to a 2011 report by consultancy McKinsey, the world's stock of equity and debt amounted to US$212 trillion in 2010. Stock market capitalisation amounted to just a little over a quarter, or US$54 trillion. The remainder consisted of debt: bonds issued by corporations, financial institutions, governments; asset-backed securities; and bank loans held on balance sheets. Government debt amounted to 69 per cent of world GDP.
Since the global financial crisis, money has flowed into debt markets as governments borrowed to fund stimulus programmes or to boost confidence in the economy, and investors fled to the relative safety of high-quality debt securities.
Among the very rich, a popular way to mint money in a low interest rate environment was to borrow from banks at a lower rate, say 3 per cent, and buy bonds yielding a higher rate, say 6 per cent. Assuming the bonds did not go into default, which would seldom happen if they bought investment-grade bonds, and assuming the lengths of both the bank loans and bonds were matched, the trades were extremely profitable at a very low risk.
But what exactly are bonds? And how do you go about bond investing?
This article gives the briefest glimpse of the world of bonds, otherwise known as debt or fixed income securities. I will focus on the simplest type of bonds, and leave the discussion of perpetuals, callable or putable bonds, convertible bonds, preference shares, mortgage-backed securities and asset-backed securities for another day.
The gist is this: Bonds are a way for companies and governments to borrow money from investors for a fixed period of time over the long term.
From the investor's point of view, bonds are generally regarded as less risky. However, they usually have to settle for lower returns. And in an environment of potentially rising interest rates as the US Federal Reserve gradually stops pumping so much liquidity into the financial system, bonds are not a recommended investment for investors who intend to sell their bonds before they are due.
How to buy bonds
I will tackle the investing question first before going into detail on the nature of bonds.
There are two ways of investing in bonds: buying the individual bond, and buying units in a bond fund.
Buying individual bonds is typically not done by the retail investor due to the large commitment required per bond, which can be $250,000 a lot. But there are a couple of options.
Singapore government bonds, for example, can be bought through an ATM machine or Internet banking platform. The minimum investment is $1,000, and people buy in multiples of $1,000.
Some bonds are also traded on the Singapore Exchange. These are known as retail bonds. There are 10 retail bonds out on the market, issued by companies such as Singapore Airlines (SIA), Olam, Genting, CapitaMalls Asia, United Engineers, and Tiger Airways.
The minimum investment required for retail bonds is typically relatively low. In 2010, SIA was the first listed company to set aside a portion of its corporate bonds for retail investors, with a minimum subscription of $10,000.
The largest amount of debt sold to investors here happened last year, when casino operator Genting made a $1.8 billion perpetual bond issue, with another $500 million of perpetuals targeted at retail investors with a minimum subscription of $5,000.
But the main portion of the bond market is traded by institutions and high net worth individuals in the over-the-counter (OTC) market, that is, not publicly in any formal exchange. To buy them, investors go through banks or through a broker. Bond professionals, however, recommend that retail investors invest in bond funds instead. These funds invest money in a variety of bonds. This is to spread out the risk, in case the company you lent money to goes belly-up. Bond funds are typically more liquid. This means they are traded more frequently, so it is easier to buy and sell at a fairer price.
There are numerous bond funds catering to bonds across different countries, geographical regions, and companies. They can be bought through the Central Provident Fund (CPF) Investment Scheme, through fund providers such as Fidelity, Vanguard and BlackRock, and offered indirectly or directly in products by insurance companies and banks.
There are a few bond funds tradeable on SGX. The ABF Singapore Bond Index Fund is one such investment. It is an exchange-traded fund (ETF) run by Nikko Asset Management, and gives investors exposure to Singapore government bonds. Its last traded price was $1.1320 a unit, and the lot size is 1,000 units a lot. The fund distributes dividends once a year. Its last distribution was announced at end-September 2012, of $0.0128 per unit, giving a yield of 1.1 per cent.
What are bonds?
Bonds are essentially a contract between a borrower and a lender.
The lender agrees to lend a sum of money to the borrower for a fixed period of time for a year or more.
In return, the borrower typically promises to pay the lender interest payments every six months, to compensate the lender for parting with the money. These payments are known as coupons.
Coupons are called thus because bonds used to be issued to investors in the form of engraved certificates. The bonds would come with multiple coupons that represented the interest payments. When they become due, say on June 30 or Dec 31, the owner would clip the relevant coupon and bring it to a bank to exchange for money. At the end of the borrowing period, the borrower will give the entire sum borrowed back to the lender, together with the final coupon payment.
This process is automated now, but the old name stuck.
If the borrower cannot pay interest payments or pay back the original sum it borrowed, it will be in default. This is a technical term that means the borrower has not met its legal obligations according to its debt contract.
The lower the credit rating of the borrower, known as the bond issuer, the higher the chance of default.
Credit rating agencies such as Moody's, S&P and Fitch are companies that help investors assess the likelihood of failure. They classify bonds into various grades, akin to the grades you get in school.
The top four grades, AAA, AA, A, and BBB (Baa for Moody's), are known as investment grade bonds. Typically, these are bonds that banks and financial institutions invest in, because these borrowers are judged to have a low enough risk.
Issuers with strong balance sheets and mature businesses tend to get rated higher. By having a higher rating, they do not need to pay investors as much interest. The yield of investment grade bonds tend to be low, say 2-3 per cent a year.
Bonds below investment grade, such as BB, B, or C-rated bonds, are considered speculative grade. These bonds are also known as junk bonds, or high-yield bonds. These companies are assessed to be riskier to invest in and lend money to, and often have to pay investors a higher interest rate, say 7 per cent or more. There is an advantage to buying the bonds of a risky company compared to buying its stock, however.
In the event of default, bondholders get paid first as a company's assets get liquidated. Stockholders are often left with nothing after that.
The bond investor also seldom loses everything even if the company defaults. A study by Moody's on 1,100 defaulting North American bond issuers from 1983 to 2003 found the average recovery rate to be 39.5 per cent, and the median, 36.6 per cent.
Bond jargon
The bond world, unfortunately, is rife with jargon. This can make it difficult for the layman investor to understand how bonds work.
The exact mechanics of bond pricing will be explained in a future piece.
But the most important thing investors should be careful of is the percentages bandied around by bond professionals.
A bond typically pays a fixed coupon rate on its face value, the amount that the issuer has to pay back upon the end of the borrowing period.
For example, an issuer might borrow $1,000 from investors with a coupon rate of 5 per cent, for a period of 10 years. This means coupon payments are $50 a year, or $25 every half-year.
There will be a total of 20 half-year payments of $25, before the investor gets back $1,000 at the end of 10 years.
But the price of the bond, or the cost to investors who buy when the bond is first issued, might not be $1,000.
It will only be $1,000 when market interest rates equal the coupon rate. If interest rates are at 5 per cent and the bond offers a coupon of 5 per cent, the market is indifferent to investing $1,000 to get $25 a half-year either in the bond, or elsewhere. Thus it is willing to pay $1,000 for this 5 per cent coupon, 10 year bond.
But if one year later, general interest rates rise to, say, 6 per cent, the market can now get more money by investing in another instrument. Demand for this bond will fall.
The price of this bond will also fall to $931.23 - even though it will continue to pay out $25 every half-year for the next nine years, and will pay $1,000 when it matures.
If investors need to sell the bond instead of holding it till maturity, they will suffer a loss.
The coupon yield, current yield and yield to maturity of a bond can all be different. Investors need to pay the greatest attention to the bond's yield to maturity, which is the bond's total return at the moment when the investor is looking at it.
Yield to maturity is the common understanding of what a bond's yield is.
Monday, May 2, 2011
Bonds and Preference Shares Listed on SGX
Definition:
Bonds
A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.
Non Cumulative Preference Shares
A type of preferred stock that does not pay the holder any unpaid or omitted dividends. If the corporation chooses to not pay dividends in a given year, the investor does not have the right to claim any of those forgone dividends in the future.
Cumulative Preference Shares
A type of preferred stock with a provision that stipulates that if any dividends have been omitted in the past, they must be paid out to preferred shareholders first, before common shareholders can receive dividends.
Bond ETF
There are 3 bond funds or Bond ETFs listed on Singapore Exchange. They are :
ABF SG Bond ETF (A35), IS Asia Bond US$ (N6M) and IS Asia HYG US$ (O9P).
Last update : 19 Jan 2017
Note:
Ex-date is about 14 days before pay dates.
NCPS - Non Cumulative Preference Shares
CPS - Cumulative Preference Shares
Link:
DBS NCPS
OCBC NCPS
UOB NCPS
Hyflux CPS
Bonds
A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer.
Non Cumulative Preference Shares
A type of preferred stock that does not pay the holder any unpaid or omitted dividends. If the corporation chooses to not pay dividends in a given year, the investor does not have the right to claim any of those forgone dividends in the future.
Cumulative Preference Shares
A type of preferred stock with a provision that stipulates that if any dividends have been omitted in the past, they must be paid out to preferred shareholders first, before common shareholders can receive dividends.
Bond ETF
There are 3 bond funds or Bond ETFs listed on Singapore Exchange. They are :
ABF SG Bond ETF (A35), IS Asia Bond US$ (N6M) and IS Asia HYG US$ (O9P).
| Code | Bond/Preference Share | Pay Date * | Listing Date |
|---|---|---|---|
| BEYZ | AspialTrea5.25%b200828 | 28/02 n 28/08 | 28/08/2015 |
| BRQZ | AspialTrea5.3%b200401 | 01/04 n 28/10 | 01/04/2016 |
| TY6Z | CapMallTrb3.08%210220 | 20/02 n 20/08 | 20/02/2014 |
| MU7 | DBS 4.7% NCPS 100 | 22/05 n 22/11 | 22/11/2010 |
| AXXZ | FCLTrea3.65%b220522 | 22/05 n 22/11 | 22/05/2015 |
| P9GZ | Genting 5.125% CPS | 19/04 n 19/10 | 19/04/2012 |
| N2H | Hyflux 6% CPS 10 | 25/04 n 25/10 | 27/04/2011 |
| BTWZ | Hyflux 6% PerCapSec | 30/05 n 30/11 | 30/05/2016 |
| BJFZ | Oxley MTN5%b191105 | 05/05 n 05/11 | 06/11/2015 |
| BTNZ | Oxley MTN5.15%b200518 | 18/05 n 18/11 | 18/05/2016 |
| GG0 | OCC 5.1% NCPS 100 | 20/03 n 20/09 | 28/09/2008 |
| BSKZ | Perennial4.55%b200429 | 29/04 n 29/10 | 29/04/2016 |
| BIOZ | Perennial4.65%b181023 | 25/04 n 25/10 | 26/10/2015 |
Note:
Ex-date is about 14 days before pay dates.
NCPS - Non Cumulative Preference Shares
CPS - Cumulative Preference Shares
Link:
DBS NCPS
OCBC NCPS
UOB NCPS
Hyflux CPS
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