The bonds pay 3.8 percent interest annually for the first to fifth year and 4.5 percent annually for the year six to 10 if they are not redeemed.
Is this a good buy?
Given the volatile stock market and low interest rate environment, 3.8% return definitely looks appealing to some investors. But first, we should clear some misconceptions about bond investing.
“Bond is boring and only for conservative investors.” Ask people around you who only invest in stocks, how many have even made money for the past 3 years? Being a risk taker doesn’t mean you have to take risky asset blindly and lose money.
“Bond has default risk!” True, but have you thought that when you buy a stock, you are also subject to “default risk”. when the company goes bankrupt? Who will get the money first during liquidation? The Bond Holder!
“10 years is too long, I want to invest in something short term.” I cannot understand why people roll their fixed deposits every 6 months with nearly no return and they can do this for 10 years. In the first place, 10 years is not long if you want to invest in something. Secondly, you can trade the bond and may even make a profit on top of your coupon payment. (the opposite is also true, refer to the main risk below)
So if you think it logically, whether you should take this offer is really why you want to take the offer. What are your objectives and strategies? 3.8% may be high to you but may be low to another person. Ask yourself these questions before you buy:
- Does this instrument fit your investment portfolio?
- Do you want to hold it for ten years?
- or Do you want to trade it immediately if there is high demand?
What is the main risk of this investment?
Default? Yes and No. Any form of investment or event cash carry default risk. How safe is your insurance company? How safe is your bank? I doubt anyone really knows.
To me, the main risk is the increase of interest rate. Bond price moves in opposite direction from interest rate. If interest rate starts to rise in the coming years, your bond value may drop and you will suffer loss if you want to sell your bond early. However, if you can hold the bond till maturity, this will not affect you.
Of course you also face some risks like earlier redemption risk etc, which I will discuss here.
How to subscribe CMA Bond?
Under the public offer, the minimum subscription is S$2,000.
Public offer period: 9 a.m. 4 January 2012 to 2 p.m. 9 January 2012
Balloting of applications for the Bonds under the Public Offer: 11 January 2012
Expected date of issue of the Bonds: 12 January 2012
Expected date of commencement of trading of the Bonds: 13 January 2012
Investors can apply for the Bonds under the Public Offer at any ATM of DBS (including POSB), OCBC, UOB, and the internet banking websites of DBS and UOB.