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I think we should ask ourselves why the retail bond market is not developed here? If the criteria for bond investment is brought down from the present 250K (Accredited Investor)to 25K. I think many Singaporeans could afford to invest in statutory and good corporate bonds. Thereby the retail bond players also will have a lively platform. In total the retail bond market will flourish.
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Dear Veerappa,
that is what MAS and SGX is trying to do. Taking quite long though.
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I purchased $10,000 SIA BONDS thru POSB ATM. Others had received Notice from The Central Depository informing them the bonds has been credited. What has happened to mine. If not successful, why the money was not returned to my POSB A/C??
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Hi Wai Fong,
You can create an online account so that you can check your CDP holdings.
http://www.cdp.com.sg/main/index.shtml
If you had applied correctly, you should have been allocated the SIA bonds.
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Wilfred is right. There is no interest rate risk if you plan to hold the bond till maturity. Thus yield to maturity is the return you will get if you hold till maturity regardless of interest rate movements UNLESS the issuer defaults.
If you dont plan to hold till maturity, then you need to consider interest rate movements. Thus there is interest rate risk.
Contact me if you need further explanation.
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Hi Wilfred,
In finance, risk is the measurement of uncertainty. So interest rate risk is the uncertainty associated with interest rates that could result your investment performing in a manner that is less than expected. Therefore its not just a matter of realization of gain or loss that matters. The opportunity cost of not being able to capitalize on better investment opportunities.
To explain this in another way, regarding the issue of holding to maturity, if interest rates rises, your discount rate for your future cash flow rises. Therefore your present value of your future cash is worth less. That is your interest rates risk impacting actual realized cash.
ReplyWilfred Ling,
Yes there is, when interest rates rises, that fact that your investment is yielding much less than bonds issued at that point means that your are holding on to a “lousy” investment with below market yield. By holding, you compromise your liquidity and lose out on possible gains.
In short, when interest rates rises by 1%, a gov issued bond for 5 years may pay greater coupon. That’s your risk.
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In finance, interest rate risk for bonds refers to the risk of realised capital lost in nominal terms. Holding to maturity has no capital lost provided there is no default. What you are referring to is called opportunity cost, not interest rate risk.
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the coupon rate is reasonable for a company like SIA where the chance of default is low. if i rem correctly, there was a swiber bond offering recently offering 5+% in coupon rates. charges wise i think for IPO bond is not too bad, they would be at most a 40-50pips difference, but if you are buying/selling a secondary bonds then yes, the fees might be excessive as you dunno what kinda spread your banker is taking off you.
just wanted to offer my 2 cents worth on bonds, there is alot of misunderstanding from people that i might who believe that bonds are super safe. which of cos isn’t true, as there is always a chance of default where one can lose every penny, but another risk i see is that we are kinda building ourselves towards a bond bubble in the next year or so. now when interest rates are low, everyone is touting bonds, but people forget that interest rates can and will go up, esp when inflation starts creeping in. with an almost non existence secondary bond market in sg, if/when interest rates goes up, there will be even fewer buyers and you gotta sell them at a bigger discount. end up you might not even earn anything or even make a loss.
ReplyThere is no interest rate risk if the bond is held to maturity. Redemption at maturity by the issuer is guaranteed at maturity. Non-redemption by issuer at maturity is considered a default.
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Comparing with SGS I reckon the spread would be 20bps or more…since SIA is a corporate issue of ‘higher’ risk. It should be more attractive otherwise who wants to buy.
Disclaimer: it is agak agak and should not be taken seriously.
Hi Watchman,
They already announced the coupon rate is 2.15%.
If bought at face value, investors would be able to get that kind of yield.
Yes if it is bought at face value,ie $1000 and the coupon and yield rate will be the same. I was thinking it was to be subject to bidding. sorry for misleading you.
ReplyYes, there’s no bidding. If demand is more than supply, there will be balloting instead.
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Is this coupon rate reasonable and if this type of bonds is risky?
Corporate bonds despite the min block size of 250k offers lousy yield after factoring in the fee charged by the bank.
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