Bonds and fixed income securities are instruments that obligate the issuer (borrower) to make periodic payments on a fixed schedule and generate an eventual return of principal at maturity.
Bonds and fixed income securities can help to meet the following investment objectives:
Bonds and fixed income securities belong to a different asset class from equities. Bonds and fixed income securities potentially allow an investor to diversify his portfolio among various asset classes in order to reduce his overall investment risk.
Predictable Income Stream
Your income stream from the investment is predictable, as you will know how much interest you can expect to receive, how often you will receive it and when your principal will be repaid. In the case of a zero-coupon bond, instead of coupon payments, the bond is issued at a discount and repaid at face value upon maturity.
In general, the longer the period of investment in a bond or fixed income security, the higher the rate of return will be, as you are undertaking a higher risk for a longer tenor.
Hence, your investment horizon greatly depends on your liquidity needs and the amount of risk you are willing to take.
Unlock Investment Opportunities with Fixed Income Margin Financing
Take advantage of investment opportunities by pledging your eligible fixed income securities as collateral. Click here for more details on margin financing.
Bonds and fixed income securities are debt instruments issued by governments and corporations.
- Conventional bonds confer ownership of a debt on the investor
- Shariah–compliant bonds grant the investor a share of an asset.
These instruments may be listed or unlisted.
- Preference Shares
Within the category of fixed income securities, preference shares are hybrid instruments, comprising properties of both equity and debt instruments. Preference shares usually carry a fixed preferential rate of dividend. They are usually non-voting shares. Unlike bonds, there is no maturity date but the issuer can repay the principal in full on the "call date".
Generally, in the event that the issuing company is liquidated, bondholders will have a higher priority claim on the company's assets, followed by the preferred shareholders. Only after these two groups of investors have been repaid, will the common shareholders of the company recover anything from the estate of the liquidated company. Preference shares are dealt on both listed and unlisted platforms.
- Islamic Bonds
Islamic bonds, commonly referred to as Sukuk, are structured in such a way as to generate returns to investors that comply with Islamic law and its investment principles. Sukuk represents undivided shares in the ownership of tangible assets relating to particular projects or special investment activity. They are available for investors who wish to adhere to Shariah principles.
There are various types of sukuk structures relating to the nature of the underlying asset. The most commonly used is where the sukuk relates to a partial ownership of an asset (sukuk al-ijarah). Other types of these bonds relate to partial ownership of a debt (sukuk murabaha), project (sukuk al-istisna), business (sukuk al-musharaka), or investment (sukuk al-istithmar). Investors would still need to make their own independent assessment as to whether the particular Sukuk satisfies Shariah principles before investing.
More information on Islamic bonds is available to Maybank Kim Eng clients. Please contact your Trading Representative.
- Listed and Unlisted Bonds and Fixed Income Securities
Bonds and fixed income securities can be listed or unlisted. Examples of locally listed bonds and fixed income securities can be found on SGX-ST's Fixed Income Board, with domestic and foreign issuers including sovereigns (e.g. Indonesia), statutory boards (e.g. HDB/LTA) and corporations (e.g. DBS/Capitaland).
Differences Between Listed and Unlisted Bonds and Fixed Income Securities
There are 2 key distinctions between listed and unlisted bonds and fixed income securities:
- Pricing Conventions
Listed bonds and fixed income securities on SGX-ST are quoted on a 'dirty' basis, where the accrued interest on the next coupon payment is factored into the price. Unlisted/OTC bonds and fixed income securities are quoted on a 'clean' basis, where the price does not include accrued interest.
- Dealing Size
The OTC bonds and fixed income market typically deals with a larger minimum ticket account size. Hence, it often experiences better liquidity.
You now have access to the universe of OTC bonds and fixed income securities that offer clean pricing, tighter bid/offer spreads and better liquidity.
Can I Buy OTC Bonds and Fixed Income Securities?
OTC bonds and fixed income securities with parallel-listed tranches on SGX-ST are open to ALL investors, subject to minimum trading denominations.
OTC bonds and fixed income securities which do not have a listed tranche on SGX-ST are only open to Accredited Investors and subject to a minimum of SGD200,000 per transaction.
|Types of Bonds and Fixed Income Securities|
|Listed on SGX-ST||Over-The-Counter|
||With Listed Tranche on
|Without Listed Tranche on
* As defined under the Securities and Futures Act.
As a Maybank Kim Eng client, you can now participate in (a) primary issues and (b) secondary trading of bonds and preference shares (perpetuals) in the OTC market.
Please call your Trading Representative should you wish to invest in OTC bonds and fixed income securities. Your Trading Representative can also help you access the following information:
- Availability of new primary issues of bonds and fixed income securities
- Availability of secondary issues of bonds and fixed income securities
- Two-way (bid and ask) prices
Please note that OTC bonds and fixed income securities are quoted on a clean price basis, where accrued interests are computed separately.
The returns on bonds and fixed income securities are driven by several factors including but not limited to market risks, issuers' credit risks, liquidity risks and call risks.
Investors should consider the following risks which are applicable to investing in bonds or fixed income securities:
Similar to stocks, the value of bonds or fixed income securities fluctuate with changing market factors such as interest rates, inflation rates, exchange rates and commodity prices. Investors should also be aware of liquidity risks, especially when deciding to sell a bond or fixed income security prior to the maturity date.
This risk involves the issuer not being able to meet its obligations in terms of coupon/dividend payments or not being able to repay the principal amount to the investor at maturity. This is also known as issuer risk or default risk.
This is the risk of not being able to execute a trade at the time and price that the investor so desires. It describes a situation where the investor is forced to accept a significantly discounted price when he wishes to sell due to the lack of ready buyers (lack of liquidity).
The OTC market is often preferred due to the presence of liquidity. OTC bid-offer spreads are also more favourable due to the difference in the price quoting system for OTC bonds (clean price) and SGX-ST listed bonds (dirty price).
Foreign Exchange Risk
When the bond or fixed income security is priced in a currency that is different from the investor’s functional currency, the investor is exposed to foreign exchange fluctuations, which will either enhance or erode the investment returns on the bond or fixed income security.
This is the risk that the bond or fixed income security with a callable feature is called by the issuer. The lower the market interest rate, the higher the possibility that the issuer will call back the bond or security so that he can re-issue the debt at a lower cost. This is disadvantageous to investors because of the uncertainty of cash flow and potential exposure to reinvestment risk at a lower interest rate.
Margin Call Risks
If you are financing your bonds or fixed income securities using margin financing, a margin call might be triggered in cases of adverse price movement or collateral valuation downgrade due to adverse credit events. You will be required to provide additional cash or marginable securities as collateral or liquidate positions within the specified period, failing which we will automatically liquidate outstanding positions to bring the margin ratio to 140% or above. If the OTC bond position has to be liquidated, it will be liquidated per tranche of either SGD250,000 for SGD issues or USD200,000 (or equivalent) for other currency issues.