Bonds are a form of borrowing. They are debt securities issued by borrowers such as governments or companies seeking to raise funds from the financial markets. They are also known as fixed income securities because most bonds pay a steady stream of interest income at periodic intervals throughout the life (also known as the term or tenure) of the bond.
This interest is known as the “coupon” and the coupon rate is expressed as a percentage of the principal, known as the “face” or “par” value of the bond. Bond prices are usually expressed as a percentage of face value. Upon maturity, bonds are redeemed at face value and bondholders are paid 100% of face value.
Some bonds do not offer coupons at all – these are known as “zero-coupon bonds” and are priced at a discount to their face value. At maturity, you will receive the face value (which includes the accrued interest on the note).
The yield on a bond depends primarily on the credit quality of the bond issuer. In any local market, the highest quality bonds are usually government bonds. They are usually followed by quasi-government or government linked entities, banks and then companies.
Do note that when comparing bonds across different countries, an emerging market government bond may not necessarily be safer than a well-rated corporate bond.
Some bonds, bond funds or bond ETFs may constitute Specified Investment Products (SIPs).
Why invest in bonds?
Bonds may be attractive for investors who want a source of regular income or to diversify their portfolio of investment assets. A diversified portfolio helps to reduce the risks caused by a concentration of similar assets. By including assets whose values do not always move in the same direction or by the same degree as other assets in the portfolio, you may give up some gains but also reduce some losses in your portfolio. For example, certain market conditions which do not support the price of shares, may actually be positive for bonds.
What are bond investment returns?
Investors earn returns from two ways
- when they receive coupons or
- if the price of the bonds they own gain in value.
Investors receive a regular coupon. If you buy a bond at 100% of the face amount and hold the bond until maturity, your return is equal to the coupon you receive. If you buy a bond at more or less than the face value, your return is based on the coupon you receive plus any capital gain or loss from holding the bond (i.e. the difference between the price you paid and the price you sold the bond.) A bond’s return is usually called its yield.
What are the types of bonds
The main types of bonds for retail investors are government bonds and corporate bonds.
Government bonds are often regarded as a proxy for risk-free assets in the country of issue and a benchmark to price other assets issued in that country. Hence, the interest rates on government bonds tend to be lower than those of bonds of other issuers of the same maturity.
When assessing the creditworthiness of a country, an investor must consider the financial health of the country, make an assessment as to its economic resilience, and the state of its public finances.
In Singapore, investors can purchase Singapore Government Securities (SGS). SGS are available as Treasury bills (T-bills) and as bonds, and are backed by the Singapore Government. Treasury bills tend to have shorter maturities of 3 months or 12 months, whereas the bonds have maturities of 2, 5, 10, 15, 20 or 30 years. You can buy SGS at primary auctions (via local bank ATMs) or in the secondary market. The minimum investment amount is $1,000.
Investors can choose to hold the SGS to maturity or sell them before maturity in the secondary market. You can trade SGS bonds via an SGS agent or dealer bank or on the Singapore Exchange (SGX). T-bills are not traded on SGX and secondary trades must be executed via an SGS dealer or agent bank.
Individual investors must have an existing individual Central Depository (CDP) account to invest in SGS. The minimum denomination to purchase SGS is $1,000, and you can invest in multiples of $1,000.
SGS are issued to the market via auctions. You may purchase SGS at primary auctions or in the secondary market. Click here for more information.
These bonds carry higher interest rates than government bonds because they generally carry more risk than government bonds.
You can purchase corporate bonds listed on SGX in the same way as you would buy equities, paying the normal brokerage fees. While corporate bonds may offer better returns than savings and fixed deposits, you should note that you will be exposed to credit and other risks.
Not all bonds are available in small denominations or suitable for retail investors.
Price Quotation of Corporate bonds and SGS bonds traded on SGX
|Prices quoted on dirty price basis||Prices quoted on dirty price basis|
|Prices include any applicable accrued interest||Prices quoted in S$ per $100 of principal amount and include any applicable accrued interest|
The trading prices of corporate bonds and SGS quoted on SGX include accrued interest. When accrued interest is included in the price quoted, the price is referred to as a dirty price. Do note that other sources may quote prices which exclude accrued interest. These are referred to clean prices. Do make sure you clarify whether accrued interest is included or not before you transact.
What are other ways of investing in bonds?
There are different ways to invest in bonds such as bond funds or bond ETFs
An investor can also gain exposure to bonds by purchasing units in bond funds.
There are different types of bond funds, including global bond funds, regional bond funds, country-specific bond funds, sector or industry specific bond funds, and high yield bond funds. Each has its own investment objective. While many funds regularly pay income (the actual amount paid depends on factors such as market conditions as well as the coupons received from the bonds held), investors of bond funds are generally encouraged to examine total returns when evaluating a bond fund’s performance. Total returns include income generated by bonds held as well as gains or losses of those bonds over a period of time.
Investing in bond funds is usually more efficient than investing directly in the same bonds comprising the funds. Firstly, you do not need as big a capital outlay as if you were to buy all the bonds in the fund. Secondly, the task of actively managing your bond holdings to control your portfolio’s risks and achieve desired returns is passed on to the fund managers. But such activities attract management fees and/or other professional charges, which will reduce the overall returns to you.
Choose a fund that suits your needs and circumstances. You should understand the fund’s investment objectives as well as the factors that can impact the returns the fund offers.
Bond exchange-traded funds (ETFs) may track the performance of certain bonds or bond indices. They may invest in a portfolio of bonds or replicate that exposure through the use of derivative products like swaps. The Bond ETFs can have different strategies.
Continue to read “what are the risks to investing in bonds“.
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