What are the factors to consider before investing in bonds?
(a) Investment objectives and timeline
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.
(i) Issuer
Government or corporation that borrows by issuing bonds and repays investors with regular coupons.
(ii) Principal
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.
(iii) Maturity
The date where the issuer must return the principal or the face value to the investor.
(iv) Coupon
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%.
(v) Yield
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.
Reference: www.sgx.com.
(c) Risks of investing in Bonds
Bond investment is not without risks; some of the risks are highlighted below for discussion:
Market risk
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
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.
Liquidity 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.
Reference: SGX
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.
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Acknowledgement
Acknowledgement
To view bonds that may only be offered to accredited investors and other relevant persons in reliance on a relevant exemption from needing to register a prospectus for such bonds, you must be or may be deemed to be an accredited investor.
You are an accredited investor if you are:
An individual –
Whose net personal assets exceed S$2,000,000 (or its equivalent in a foreign currency) in value, of which no more than S$1,000,000 (or its equivalent in a foreign currency) in value is contributed by the net estimated fair market value of his/her primary residence; or
Whose financial assets (net of any related liabilities) exceed S$1,000,000 in value (or its equivalent in a foreign currency); or
Whose income in the preceding twelve (12) months is not less than S$300,000 (or its equivalent in a foreign currency).
A corporation with net assets exceeding $10 million in value (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe, in place of the first amount, as determined by —
The most recent audited balance-sheet of the corporation; or
Where the corporation is not required to prepare audited accounts regularly, a balance-sheet of the corporation certified by the corporation as giving a true and fair view of the state of affairs of the corporation as of the date of the balance-sheet, which date shall be within the preceding 12 months;
Or You have the intent and financial capability to transact not less than S$200,000 (or its equivalent in a foreign currency) per order to be paid in full.
I am an accredited investor; and/or
I have the intent and financial capability to transact not less than S$200,000 (or its equivalent in a foreign currency) per order to be paid in full;
I have read the Risk Disclosure Statement and fully understand the risks involved in investing in Debt Securities.
*Risk Disclosure Statement
Debt Securities and debt-linked investments offer fixed returns over a defined period and are intended to be held to maturity. These instruments carry a significant amount of risk such as credit, currency and liquidity risks. Credit risk arises from default events that may result in the inability of the issuer to pay interest or principal. Default risk is high when credit rating is non-investment grade or non-rated. In a default situation, the buyer may lose both interest and principal. Currency risk arises from holding Debt Securities that are issued in foreign currency, hence exposing the buyer to fluctuations in exchange rate. There is a high chance that if the currency moves adversely, the buyer may lose more than his original interest and principal. Liquidity risk refers to the availability of prices for buying or selling into a market. It is common for most Debt Securities to suffer from poor liquidity because they are quoted over-the-counter.
Over the counter (OTC) products are not listed or available on an officially recognized securities exchange, but traded directly between two parties (buyer and seller) on a principal basis, unless otherwise stated. As a result, an OTC transaction is individually negotiated between two parties and the Customer is thus exposed to the credit risk of the counter party in which they enter into bilateral agreement with. In addition, the Customer will at any time be exposed to liquidity risk and PSPL cannot and does not warrant that there is an active trading market and the price PSPL secures for the Customer will at any time be the best price available to the Customer. In entering into an OTC transaction with the Customer, PSPL may make profit despite the Customer incurring a loss. The Customer should consider carefully whether each OTC product is suitable in light of the Customer’s investment experience, objectives, financial position, risk propensity and other relevant considerations. Customers should therefore ensure that they understand the risks associated with OTC products and transactions and seek independent advice, if necessary, before making a decision to invest in any OTC product.
Where PSPL re-sells an obligation of an Issuer or Third Party, the Customer accepts that PSPL is not obliged to settle the underlying obligation of such Issuer or Third Party and the liability of non-payment by Issuer or Third Party is to be borne by Customer and that such a transaction shall be deemed settled upon the Customer payment for the same.
