Bonds are low-risk investments that can earn you a consistent return. Bonds have been a common source of low-cost funds for businesses and long-term savings accounts for private individuals and institutions.
Bondholders are creditors, meaning they claim the issuer’s assets as collateral for their investment if the borrower defaults on its debt obligation. In exchange, bondholders receive interest payments from the issuer at regular intervals over the life of the loan.
The main benefit of bonds is their flexibility. Investors can choose the bond structure they want to use – Singapore Savings Bonds, Singapore Government Securities (10 years) or Singapore Floating Rate Notes (3 months). There are different benefits to each of these structures for different types of investors.
10 Key issues of trading bonds
In Singapore, there are many ways that you can invest in bonds. Let’s take a look at some key things that you should know about bonds!
Fixed income with periodic cash flows
Bonds provide investors with fixed income returns through a common interest or dividend payments, but unlike equities, they also offer investor protection against inflation with a tangible value.
Fixed income with market risks
While stocks are subject to market risks, bonds aren’t impervious to them. The value of your bond can go up if interest rates fall, but it could also go down if interest rates rise.
Investment grade and high yield bonds
Bonds for investors come in two primary forms: Investment Grade (IG) and High-Yield (HY). But, as their names suggest, IG bonds refer to those with low credit risk, whereas HY denotes those assigned a speculative or junk status according to the ratings assigned by agencies like Global Ratings and Moody’s.
Government-issued debt has its class of debt known as sovereign debt. These kinds of bonds are considered low-risk investments, but they’re not without their own set of risks. For instance, the lack of liquidity or trading volume can make obtaining fair market value for your bonds difficult.
Difference between nominal and real bond returns
You can break down the return from a bond into two components: Nominal yield, which is the coupon rate paid to the investor during its life, and Real yield, which considers inflation. Nominal yields are used when standardizing comparisons across different countries with different inflation rates. However, real yields are often more informative for investors who want to compare returns after adjusting for inflation.
Tax implications on income
Interest payments are taxable at different rates depending on the type of issuer (corporations versus government). Government-issued bonds are usually exempt from taxes, but corporate bondholders may pay tax on their annual income.
Bond trading occurs through two methods: dealer or block transactions. Dealers act as principals and trade with other dealers or their clients, whereas block transactions allow investors to buy many securities directly from the issuer by discounting them against market value.
Corporate bond risks
When buying corporate bonds, investors take on credit risk (the chance that the company will default on its debt obligation) and call risk (if there is a provision for early redemption in the case of a callable bond).
There are two main types of indexes used to measure bond performance: Fixed income indexes and Credit Suisse Composite Bond Index. The latter provides a broader perspective for investors as it tracks a wide range of bonds from different issuers, sectors, and currencies.
Bonds typically have original maturities ranging from one year up to 30 years. Some types of debt securities can even reach maturity within one day!
The ten things you should know about bonds in Singapore are just the beginning, as there’s still plenty more that you need to know before investing in them. Talk with an investment professional or do additional research about what makes these debt instruments unique and alluring before putting your money on them. For more on reputable online brokers like Saxo Bank, follow this link.