Overview
Bond is a debt instruments. The purpose of the issuance of bonds is to raise funds by borrowing from the public in a specified period. Generally, there are terms for each bonds stating the maturity date which principals will be repaid and the coupon interest payment date. Unlike shareholders, holders of bonds and notes are not owners of an entity but its creditors.
Bonds can divide to three main categories according to the issuers:
1、Government Bond
The bonds issued by state or government in its currency. For example, US Treasury Bonds and China Government Bonds are issued by US Department of the Treasury and PRC Ministry of Finance respectively to raise funds for the governments.
2、Semi-Government Bond
The bonds issued by public corporations, the status is lower than government bonds, but the credit ratings is similar when compared with Government Bond, e.g.: The Hong Kong Airport Authority (HKAA), Hong Kong Mortgage Corporation Limited (HKMTGC)
3、Corporate Bond
Corporate bonds are debt securities issued by private and public corporations. A debt security may be callable meaning that the issuer may redeem the debt security before it matures. Corporate bond may be convertible, bondholder could convert the bond into a particular number of shares of the issuing corporation. Some bonds could allow the issuing corporation to convert the bonds in specified conditions.
Bonds can be categorized by different terms of interest rates:
1、Fixed-rate Bond
Coupon rate of this bond is fixed, the rate will not change until maturity.
2、Zero-coupon Bond
Holder of this kind of bonds do not entitle any interest payment but usually the price of this kind of bond is discounted and the benefits of investing in this bond can be reflected by its bond price.
3、Floating-rate Bond
Coupon rate is adjusted over a pre-determined period of time with reference to certain market interest rate indicators. Normally the rate takes reference from market rates like HIBOR and LIBOR.
Points to note for Investors
1) Price of Bond
If investors wish to buy and sell bonds prior to maturity, they should be aware of the potential fluctuations in prices. Similar to other types of securities, bond prices fluctuate in response to the forces of supply and demand.
2) Interest Rate
The price of a fixed rate bonds usually moves in the direction opposite of market interest rates. If interest rates go up, the price of the debt security will, other factors being equal, go down, thereby increasing the current yield (the annual interest payment divided by the price of the bond) and bringing it into line with the higher coupon rates offered by new debt issues.
3) Time to Maturity
As a general rule, when there is a long time to maturity (the date on which the borrower must pay back the principal), the price of the debt security is likely to be more volatile because the longer the time, the greater the risk.
4) Credit Rating
Investors should note that the payment of the interest and the repayment of the principal are subject to the credit risk associated with the issuer or the guarantor.
5) Yield to Maturity
The yield to maturity on a bond is the internal rate of return an investor will receive by holding the bond to maturity. It takes into account the sum of the interest payments, the redemption value at maturity and the purchase price. In general, the longer the life of a debt security and the lower the credit rating of the issuer, the higher will be the yield to maturity.
6) Overall Market Conditions
Returns on a bond are influenced by factors such as the rate of inflation, unemployment rate, economic growth, balance of payments data, retail sales, industrial production and political changes.
7) Exchange Rate Risk
For a bond denominated in a currency other than Hong Kong dollars, investors may suffer losses due to changes in exchange rates.
8) Liquidity Risk
Hong Kong investors tend to buy and hold bonds until maturity. Therefore, liquidity for many bonds in the secondary market may be low.
9) Bond Issue Terms
It is important that investors pay attention to the terms of the issue, e.g. a bonds may be redeemed/called before maturity.
