Bonds are one of the instruments to diversify one’s investment portfolio. Depending on the issuer’s financial/credit standing, it can potentially be a good instrument for investment, earning regular interest income.
Customer will need to decide on his/her personal investment timeline in the selection of bonds based on the maturity dates. This affects the cash flow and the amount of risk the customer is prepared to bear. Generally, the longer the period of investment, the higher the return and risk involved. Longer tenor bonds are more sensitive to movement of interest rates and the customer who invests in these bonds may potentially make greater capital gains or losses if he/she sells off the bond investments before maturity.
(b) Features of the Bonds
There are different types and grades of bonds, from simple plain vanilla bond to those with call/put or convertible covenants.
Government or corporation that borrows by issuing bonds and repays investors with regular coupons.
Nominal value of the bonds issued or amount of money borrowed by the issuer that will be repaid to the investor upon maturity of the bond. Commonly also known as face value, or par value.
The date where the issuer must return the principal or the face value to the investor.
Interest payment made on a bond by the issuer in regular periods to repay the investor for holding the bond. Coupons are usually paid semi-annually.. For example, a $1,000 bond paying $40 a year has a coupon rate of 4.0%.
It is the annualised return earned on a bond. It is calculated by dividing the coupon rate by the price of the bond and expressed in percentage terms.
(c) Risks of investing in Bonds
Bond investment is not without risks; some of the risks are highlighted below for discussion:
The value of the bond is subjected to interest rate changes, as well as demand and supply forces. Bonds, in particular, are sensitive to interest rate fluctuations and the prices of bonds move in opposite direction with interest rates. Despite this consideration, this risk is more pertinent if the investor decides to sell the bond and not hold it to maturity
Credit risk highlights the fact that the issuer may default on payment of the coupon, and even the principal amount if the issuer has problems meeting its obligations as promised. This is also known as default risk or issuer risk.
When there is a lack of buyers or sellers in the market, the investor may not be able to execute the trade or may be forced to trade at a value significantly away from the investor’s desired price. This can be deemed as liquidity risk.
Foreign exchange risk
The investor is exposed to fluctuations in foreign exchange rates when the investor trades in bonds that are denominated in a currency other than the functional currency of the investor. This may erode the returns on the bond investment.
Customers are advised to consider all risks by reading the prospectus/information memorandum/term sheet or seeking advice from a qualified financial adviser representative before they make a commitment to purchase any bonds.
[S$(1000-900) / S$900] x 100 = 11.1%.
If the bond price falls to S$850, the yield-to-maturity on this bond will be higher:
[S$(1000-850) / S$850] x 100 = 17.6%
Likewise, when the bond price rises to S$950, the bond’s yield-to-maturity will fall:
[S$(1000-950) / S$950] x 100 = 5.3%
Intuitively, if you bought your bond when interest rates were at 4%, and if interest rates rose to 6%, it would mean that you would be able to sell your bond at a lower price than what you paid for it. This is because investors can buy new bonds that will give them a higher yield (i.e. 6%). The price of your bond will therefore decline. On the other hand, if interest rates fall, investors will find your bond attractive relative to new bonds with lower yields. Therefore, the price of your bond will rise.
For example, SGD 250 000 Corporate Bond was bought at the price of 102.00 % (of the principal amount) on 23 March 2015. (Trading account to be pre-funded) It carries a coupon of 5.90% per annum and matures on 17 July 2017. The corporate bond was issued on 18 July 2014.
Accrued interest: 68 days. Yield to maturity: 4.96%. Coupon payment: 17 Jan & Jul
The investment is as follows (Assume the day convention is 365 days):
Principal amount payable
= Principal x Bond price
= SGD 250,000 x 102.00/100
= SGD 255,000
Accrued Interest payable
= Principal x coupon x number of days after last coupon payment
= SGD 250,000 x 5.90/100 x 68/365
= SGD 2,747.95
Total amount payable by the investor client
= Principal amount payable + Accrued interest payable
= SGD 255,000 + SGD 2,747.95
= SGD 257,747.95
• There are no commission for bond trading. A percentage spread is included in the price of the bond quoted to the client.
• There is a custody fee of 0.05% p.a of the market value and GST payable monthly for bonds under custody with Clearstream/Euroclear.
Administrative charges for custody of Bonds cleared via CDP
Transfer-in charges (into Clearstream)
USD$18 per bond/instruction (regardless of size)
Admin fee of 0.25% (nominal value)
Transfer-out charges (out of Clearstream)
SGD53.50 + USD$18 per bond/instruction (regardless of size)
Transfer-out charges (out of CDP)
SGD21.40 bond/instruction (regardless of size)
For relevant forms and documents required to be an Accredited Investor, please click here.
Definition of an Accredited Investor
An Accredited Investor (Individual) is:
An individual with net personal assets exceed in value of SGD 2 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount. Loans, overdrafts and/or credit facilities which the individual has with other banks and financial institutions will have to be deducted from his gross personal assets to generate his total net personal assets;
Whose income in the preceding 12 months is not less than S$300 000 (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount.
An Accredited Investor (Corporation) is:
The company’s total net assets (i.e. assets minus liabilities) must exceed SGD 10 million (or equivalent in foreign currency) as determined by the most recent audited balance-sheet of the company.
No processing fee
No platform fee
No custody fee for bond cleared via CDP