| Standard Chartered Bank |
THERE are numerous investment products available in the market but the main asset classes remain with Bonds, Equities, Derivatives, Unit Trusts and Foreign Currency. Amongst all of these investment products coupled with the services that financial institutions have to offer, bonds generally carry lower levels of risk, are less volatile and are considered stable investments. But with unfamiliar terms like coupons, issuer and maturity, you may find yourself a little lost in translation. Here is a breakdown of the basics on Bonds.
What is a bond?
A bond is a debt security where the bond issuer (the borrower) issues the bond for purchase by the bondholder (the lender). It is also known as a fixed income security, as a bond usually gives the investor a regular or fixed return.
A bond is essentially an IOU. When you invest in a bond, you are essentially lending money to the bond issuer. In return, you are entitled to receive: interest payments (coupon) at scheduled intervals and capital repayment of your initial principal amount at an agreed date in the future (maturity date).
What is bond quality?
Before you make an investment decision to invest in a bond, it is important to consider the quality of the bond (or the creditworthiness of the issuer). You can do that by looking at its assigned bond rating. This is a credit rating given to the bond by specialised rating agencies, after they have reviewed the issuer’s financial condition and debt repayment ability.
Bond assigned ratings above a certain threshold are considered investment grade, while bonds rated below the threshold are known as sub-investment grade or high-yield bonds.
Which bond is suitable for you?
Depending on your risk appetite, when making your investment decision you may choose to invest in either an investment grade bond, or a high-yield bond:
An investment grade bond is a more secure investment and should give you a stable source of investment income;
A high-yield bond pays a relatively higher return, but carries with it a higher risk of default and will therefore require closer monitoring.
However, in all cases, the repayment of bonds is always subject to the creditworthiness of the particular issuers.
What types of bonds are there?
Fixed rate bonds are the most common form which pay coupons (interest) at regular intervals.
Zero-coupon bonds do not pay coupons but sold at a discount, and you receive the principal at maturity, thus effectively a capital appreciation.
Floating-rate Notes (FRN) pay a floating rate of interest as these payments are linked to a market benchmark, hence the coupon payments change according to the movements in the market benchmark.
What do you do with your bond?
After you invest in a bond, you can choose to hold on to the bond until maturity. You will receive all the scheduled coupon payments in the intervening period, and recover the principal repayments at the end of the term.
The rate of return which you will earn from buying and holding the bond to maturity (expressed as a percentage) is referred to as the bond yield.
Alternatively, as a bondholder you may choose to sell the bond in the open market prior to its maturity date. There are secondary bond markets, where – just as in stock markets – you can monitor bond prices and trade them to try and realise capital gains.
In order to do so, you will need to understand a key determinant of price movements in the bond market – interest rates.
Why invest in bonds?
Regular income – bond issuers are bound by the terms of the bond to pay out regular coupon income to bondholders.
Diversification of investment portfolio
Potential capital appreciation – like all instruments traded in the secondary market, the price of bonds can appreciate over and above the initial purchase price, and allow you to realise capital gains.
What are the risks?
Like all investments, bonds are subject to several types of investment risks. Some of these include:
Credit or Default risk – this is the risk that the bond issuer or borrower is unable to meet the coupon or principal payments on any outstanding bonds or debt when they fall due, and go into default.
Interest rate risk – As interest rates and bond prices are inversely related, should interests rates rise, the price of your bond will tend to fall.
The longer the time to maturity of a bond, the greater the interest rate risk.
Foreign exchange risk – Some bonds are denominated in a foreign currency, which may fluctuate against our currency. The impact of such foreign exchange movements may offset any interest or capital returns you may receive from the bond investment.
Standard Chartered Bank is the first bank in Brunei to distribute bonds of major currencies – SGD, USD, GBP, EUR, NZD & AUD from Corporate and Financial Institutions globally.
Standard Chartered Bank offers a wide range of investment and wealth building products that come hand in hand with sound financial advice from the Bank’s trained Wealth Management Consultants available at all Standard Chartered Bank branches throughout Brunei.
This article is for general information purposes only and while the information in it is believed to be reliable, it has not been independently verified by us. You are advised to exercise your own independent judgement with the contents in this article.
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