Last time we introduced bonds. This short write-up is meant to bolster your understanding of bonds and what kinds of bonds exist in the markets out there.
Treasury bills and bonds
Treasury bills differ from bonds in that there are short-term debts issued by the Government. This is in comparison with bonds, which has a maturity of 10 years, 20 years or 30 years. The other difference between the two is interest payments. Bonds pay out regular interest semi-annually. Treasury bills are normally zero-coupon bonds. They are issued below par value and at a discount and are redeemed back at par value. The difference then forms the yield on the bond. Both instruments are issued in denominations of $1,000.
Corporate bonds are issued by companies in accordance to their preferred capital structure. Bonds may take the form of being secured or unsecured. Secured bonds are bonds that are being backed by a collateral. For example, a bond issue which is backed by the company’s facilities means that in the event the company defaults on it’s liability, the bondholders may possess the facilities to recuperate their losses. An investor also needs to know that some of the corporate bond issues are only allocated to institutional investors like the insurers or banks while some are opened to retail investors. Coupon yields varies across companies in accordance to their credit rating. Companies with good fundamentals yield a lower coupon rate compared to companies with an average fundamental. This explains the default risk the investor bears and in return, he/she is rewarded a higher yield.
In the context of Singapore, quasi-government bonds are bonds issued by our statutory boards. The most prominent few are the Housing Development Board (HDB) and Land Transport authority (LTA). They are termed as Quasi-government because of their nature of activities which are usually overseen by a board of directors, and typically come under a specific government ministry. Due to this special feature, statutory bonds generally possess a decent credit rating.
We hope you’ve found this introduction to the various types of bonds helpful. Do comment if you have any questions. We would love to hear from you!
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