Basics on Bond Investments

Basics on Bond Investments

Investors buy bonds to make Money from Interest Income and Capital Gains.

Earning Interest Income is fairly straight forward. Movement in the Bond Prices will either result in Capital Gains or Losses. Investors can sell Bonds in the secondary market if they do not wish to hold it until maturity.

Factors Affecting Bond Prices
1) Interest Rates
2) Credit Quality of Issuer

1) Interest Rates have an inverse relationship with Bond Prices. If interest rates goes up, the Price of Bond drops. This is because Investors will demand a higher return than the coupon rate. They would rather buy a newly issued Bond at a higher yield.

2) The Bond price will sink if the Credit Quality of Issuer deteriorate. If the health of the Company changes from healthy to the verge of bankruptcy, other bond investors are unlikely to buy it from you unless the Bond price drops.

If the bond prices rises, the yield to maturity declines. The bond investors can choose to hold on to the bond and or sell it into the open market to make a capital gain. The bond investor can reinvest the proceeds into another bond with a higher yield to maturity.

Please see http://lionelltp.blogspot.sg/p/bonds.html to know about Bonds.

If you are interested in Bond Investments, please contact me at 90400848 or email to me at tplim1975@gmail.com.

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Bonds, Fixed Income, Perpetual Notes

Bonds, Fixed Income, Perpetual Notes

Do you feel uncomfortable of the volatility of the stock market?
Are you keen to know more about Fixed Income Investments?

If yes, please see below.

A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate.

To know more about bonds, please see
http://www.moneysense.gov.sg/Understanding-Financial-Products/Investments/Types-of-Investments/Bonds.aspx


The 2 main type of bonds that provide higher yield are:

1) Corporate Bonds
2) Perpetual Securities

Difference between Corporate Bonds and Perpetual Securities.
Corporate bonds are issued by a Corporation and sold to investors. The tenor of the Corporate Bonds are normally range from 2-7 years. The Yield of the Bond depends on the Credit Quality of the Bond Issuer. The Corporate bonds are redeemed by the issuer upon maturity. 

Perpetual Securities are hybrid securities that combine the features of both debt and equity. Perpetual securities do not have a maturity date but can have a callable date. 
The issuer may include step up feature on coupon payments after the callable date, if the issuer may, but is not obliged to redeem the perpetual securities on the callable date.

If the issuer does not exercise the redemption option, you can only exit your investment by selling the perpetual securities in the secondary market.
You will be exposed to market price fluctuations and liquidity risks.

FAQ
1) Is there a possibility that the listed issuer of the perpetual bonds chooses not exercise the option of redeeming the bonds?

Ans: The possibility is always there, but I think the probability is low. The reason is because the perpetual bonds normally have a step up feature on the callable date. If the issuer does not redeem the perpetual bonds, the coupon will be reset at a higher rate which will strain the balance sheet of the issuer.
If the listed issuer does not have sufficient funds to redeem the bonds, the Company will normally attempt to raise funds via new bond and or equity placement, equity rights issue, bank borrowings, and or sell assets.

2) Will the issuer of Corporate Bond or Perpetual notes ever default?

Ans: There is always a possibility. Please do your own due diligence and or consult your financial adviser. Always invest in a viable business and a well managed and well run company. If there is a default, you make not get back anything or your whole capital. Fundamentals of company may change with the economic and external environment.


If you are interested in Bond Investments, please contact me at 90400848 or email me at tplim1975@gmail.com.