With the upcoming introduction of the Singapore Savings Bonds to the financial market in Singapore, there is greater interest in bonds as an investment instrument. Our article today aims to highlight several things an investor should take note of when he or she is thinking about buying bonds, in particular, corporate bonds.
What are corporate bonds?
By definition, corporate bonds are debts issued by a corporation.
This means that the company that issued the bond is responsible for the full and timely repayment of the debt. If a company runs into trouble, or even goes bankrupt, it will have to be liquidated and any money received would be used to pay out its outstanding debt such as its bond. There is no guarantee that the investors would receive back his or her principle amount invested.
As such, corporate bonds are almost always considered more risky than government bonds and would most likely pay a higher interest rate, even for top-flight companies.
For greater understanding, we recently covered several products that are bunched in the bond family.
Building on this, we want to add that corporate bonds offer a viable fixed income investment with visible future cashflows. Typically, the interest offered on quality corporate bonds range from 3% to 6%. Investors will know exactly when they will receive their interest payments (a.k.a coupon payments), how much they will get, as well as when the bond matures, which is when the par value of the bond will be repaid back to the investors.
Interest payments are usually paid out every six months and the maturity of corporate bonds usually span between 1 to 10 years.
Other points to take note of include whether the bond is traded on OTC (Over-The-counter) markets or available on SGX. Bonds that are traded on OTC markets usually come in denominations of $100,000 and $250,000 and will require you to go through specialised agents to buy them. In addition, there will also be management fees charged for such bonds.
Alternatively, there are also retail bonds that can be bought on SGX. These are sold in lots of 1,000, and subjected to market fluctuations such as changes in interest rates. Bonds would usually sell for an initial price of $1,000. Such bonds include the Genting SP 5.125% Perp bond and the recently released FCL Treasury 3.65% bond.
Advantages and disadvantages of corporate bonds
As a summary, here are some advantages and disadvantages of buying corporate bonds.
|Yields||They offer better yields than bank deposits and government bonds.||They carry higher risks – credit and default and liquidity risks and in certain cases, even forex risks.|
|Payments||Payments periods and amount are known to the investors. Capital is preserved, unless the company defaults.||Usually provide less return than REITs and other high yield equities.|
|Safety||Corporate bonds are usually given credit ratings, thus assigning a “safety” standard.||In events of global crisis, even the safest debt can default, as witnessed in the 2008 credit crisis.|
|Diversity||Corporate bonds offer a way to diversify risks by holding a different type of investment product.It also offers a way to diversify into different sectors, depending on the company that issued the bond, without taking up ownership in companies.||Investors have to understand the companies in which they are buying their bonds from.|
|Liquidity||Certain bonds can traded on SGX.||Majority of corporate bonds can be traded on OTC markets. This has been made more transparent by FundSuper’s recently released Bonds@FSM platform. Investors can track prices and find suitable bonds.|
Savvy investors could consider adding corporate bonds into their portfolio. As a disclaimer, some bonds can offer up to 9% interest as well. In such circumstances, investors should understand the concept that any bonds that offer high interest rates would logically come with higher risks. Otherwise, there would have been no need for the company issuing the bond to entice investors with high interest rates in the first place.
As a parting note, we recommend investors to seek proper advise before embarking on any trading activities. A rule of thumb we like to use is that you should always understand a product fully before investing, no matter how lucrative it appears from the outset.
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