Types of Bonds
There are mainly two broad categories of bonds, depending on who issues the debt:
1. Government Bonds
2. Corporate Bonds

Government Bonds
Besides collecting taxes, governments can also issue bonds to obtain long-term
financing. Bonds issued by the government are generally considered to be risk-free
assets in their respective countries as they have the full backing of the government.
They are the benchmark that all other bonds issued in the country are referenced. In
some countries, they are also called treasury bonds. However some countries have
at one point of time been unable to pay their creditors as promised. These countries
are said to have defaulted.

The ability of the government to pay up the debt ultimately depends on the
performance of the economy. Investors will have to study the financial and political
status of the country to determine the risk of default. Some developing countries
issue bonds in a foreign currency, for example, US$ Brazilian bond rather than a
Brazil Real bond. Such bonds may carry a higher probability of default.

Singapore Government Securities (SGS)

In Singapore, the Monetary Authority of Singapore issues SGS on behalf of the
Government. Unlike many countries, the Singapore Government does not use debt
to finance its expenditure. Instead, SGS are issued to meet banks’ needs for a risk-
free asset in their liquid-asset portfolios and as part of a broader strategy to grow
Singapore into an international centre for debt capital management.

SGS are available as Treasury bills (T-bills) and as bonds, and are backed by the
Singapore Government. Treasury bills have shorter maturities of up to 12 months,
whereas the bonds have maturities of 2, 5, 10, 15, 20 or 30 years. You can buy SGS
at primary auctions (via local bank ATMs) or in the secondary market. The minimum
investment amount is $1,000.

The primary market is where new securities are issued for the first time. The amount
paid by the investors funds the issuer directly. The secondary market is where
investors trade their securities with other investors.

Investors can choose to hold the SGS to maturity or sell them before maturity in the
secondary market. You can trade SGS bonds via an SGS agent or dealer bank or on
the Singapore Exchange. T-bills are not traded on SGX and secondary trades must
be executed via an SGS dealer or agent bank.

FAQ for individual investors can be found on the SGS website - www.sgs.gov.sg

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Singapore Savings Bonds (SSB)
MAS launched the Savings Bonds programme in the second half of 2015. Individuals
will be able to apply for and redeem Savings Bonds through local bank ATMs; or via
DBS/POSB internet banking channels. Individuals will be able to apply for each
Savings Bond issue with as little as $500, and up to $50,000. In addition, individuals
will be able to hold up to $100,000 of Savings Bonds at any point in time.

Singapore Savings Bonds are backed by the Singapore Government. They aim to
provide individual investors with a long-term savings option that offers safe returns.
This will expand the range of simple, low-cost investment options available to
individual investors to help them meet their long-term financial goals and retirement
needs.

The government is committed to maintain the Savings Bond programme for at least
5 years and will issue new Savings Bonds monthly after the first issue in September
2015.

The following features make them accessible and suitable to individual investors:

 Term of ten years: This allows individuals to save for the long term and
receive higher long-term interest rates

 Flexible redemption: Bond-holders can choose to get their money back in any
given month, with no penalty. This means that individual investors do not have
to decide upfront how long they wish to invest.

 Step-up interest: Investors will earn interest that is linked to long-term

Singapore Government Securities (SGS) rates. Unlike SGS that pay the same
coupon each year, Savings Bonds will pay coupons that “step-up” or increase
over time. As a result, the average interest rate is higher the longer the
Savings Bonds are held.

Source: MAS, Singapore Savings Bonds Factsheet

 

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For example, interest rates for the Savings Bond issued on 1 October 2015 are
calculated from the average SGS interest rates over the month of August 2015 and
fixed as follows:  

Year from 1 2 3 4 5 6 7 8 9 10
Issue Date
Interest % 0.96 1.09 1.93 2.93 3.25 3.25 3.25 3.25 3.30 3.70
Average
return/year %* 0.96 1.02 1.32 1.71 2.01 2.20 2.34 2.44 2.53 2.63
*At the end of each year, on a compounded basis. 

Holder of this issue will receive of 0.96% in semi-annual coupons in the first year.
Coupons will step-up to 1.09% if issue is held for another year. The annualised
compounded return over 2 years will then be 1.02% which is the same return as a 2-
year SGS yield.

 Cannot be traded in the secondary market: This removes the interest rate risk.

Unlike SSB, all other bonds have to be sold in the secondary market if the holder
does not want to hold till maturity. If interest rates rise during the holding period, the
price of the bond will drop, hence the holder of the bonds will have to bear the risk of
selling at the loss. This risk does not exist for SSB.

FAQ for Singapore Saving Bonds can be found on

http://www.sgs.gov.sg/savingsbonds/Resources/FAQs.aspx

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Comparison of Savings Bonds with Fixed Deposits and SGS Bonds

  Fixed Deposits  Savings Bonds  S’pore Government 

Security 
Maximum Tenure  3 years usually  10 years  30 years 
Yield  Set by bank at start  Steps up to match  Set at start through 
starting SGS yields  auction, 
subsequently by 
market 
 
Early Redemption  Principal, no interest Principal plus  No early redemption 
Amount  accrued interest 
 
Frequency of  At maturity  Six months  Six months 
Interest 
Source of  S’pore Deposit  S’pore government  S’pore government 
Guarantee  Insurance Corp 
 
Ability to Trade  No  No  Yes 
Maximum  None  $50,000 per issue.  None 
Investment  Maximum $100,000 
at any point of time. 
 
Minimum  Varies  S$500, thereafter in  S$1,000, thereafter 
Investment  multiples of S$500  in multiples of 
S$1,000 
 
Eligibility  Anyone  Individuals  Anyone 
Issuance  Any time  Monthly  Varies 
Use of CPF Funds  No  No  Yes 
       

Source: Business Times 31 March 2015 – Old Bonds, New Comforts. (Updated with announcements
from MAS as of 11 May 2015)

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Corporate Bonds
Bonds are a form of financing which corporates can use to diversify sources of
funding. In general, corporate bonds carry higher interest rates than government
bonds because they generally carry more risk than government bonds.

You can purchase corporate bonds listed on SGX in the same way as you would buy
shares, paying the normal brokerage fees. While corporate bonds may offer better
returns than savings and fixed deposits, you should note that you will be exposed to
credit risks and other risks.

Trading of these bonds is subject to the minimum trading denominations which

sometimes are out of reach of the average investor. MAS and SGX are planning to
introduce the Seasoning Framework and Exempt Bond Issuer Framework to
enhance retail investors’ access to corporate bonds.

Under the Seasoning Framework, wholesale bonds initially offered to institutional

and accredited investors by issuers who satisfy specified criteria (e.g. size, a listing
track record and strong credit profile) can be re-denominated into smaller lot sizes
after a six-month seasoning period and made available to retail investors via
secondary trading on SGX. In addition, such eligible issuers can offer to retail
investors, without a prospectus, additional bonds with the same terms (except for
price, original tenor, size and date of issuance). The issuer instead provides a
product highlights sheet and the offer document that was furnished to the institutional
and accredited investors during the initial offer of the wholesale bonds.

Under the Exempt Bond Issuer Framework, issuers who satisfy the eligibility criteria
at higher thresholds can offer bonds directly to retail investors without a prospectus.
Instead, the issuer provides a simplified disclosure document and product highlights
sheet to retail investors. Retail investors will therefore be able to acquire bonds
directly from an issuer at the onset, without having to wait for six months for the
bonds to be seasoned.

Appendix A explains the difference between trading of bonds on a clean or dirty

basis.

There are several variations of corporate bonds. Those commonly found in the
Singapore market are described below.

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Corporate Bond Variations

Unsecured Bonds
They represent unsecured debt of a corporation and are backed by the credit quality
of the issuer. They are the most frequently issued type of corporate bonds.

In the event of a default by the issuing corporation, unsecured bondholders have a

lower priority in receiving their claim as compared to creditors with a higher legal
claim. To illustrate, the senior debt holders get repaid first, followed by subordinate
or junior debt holders, then followed by equity holders.

Callable Bonds
The issuer of such bonds has the right to redeem the bonds before their stated
maturity date. Depending on their structure, callable bonds may have predetermined
call dates. The call price is the price that the issuer must pay to the investors of the
bonds upon early redemption of the bonds.

Issuers are likely to exercise their call option when interest rates are low, since they
may be able to refinance their loans at a lower market interest rate.

Investors of callable bonds face call risk. This comprises mainly face reinvestment
risk since they lose out on the higher interest rate on their bond and may have to
reinvest at less attractive prevailing rates.

Puttable Bonds
The bondholder has the right to have the bonds redeemed before their stated
maturity date. The put price is the price that the issuer must pay to the investors of
the bonds upon early redemption of the bonds.

They usually cost more than callable bonds as they provide the investor with the
right to decide on the redemption date. In a rising interest rate environment, the
investor may wish to have the bond redeemed early to avoid being caught by falling
bond prices.

Convertible Bonds
The holder has the right to convert the bond into a predetermined number of shares
of common stock of the company. Therefore, the stock and bond price can influence
the price of the convertible bond.

When a bond is converted to common stock, the company’s debt is reduced as debt
is converted into equity.

Conversion ratio is the number of shares of common stock an investor is entitled to

receive upon conversion. It is expressed as a conversion price or a ratio. If the ratio
is 45:1, this means that the face value of the bond can be exchanged for 45 shares.

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Example
Convertible bond with face value of $1,000 that pays a 4% coupon with a maturity of
10 years and a conversion price of $25.

Conversion Ratio = Face Value of Bond / Conversion Price

= $1,000 / $25
= 40 shares

Conversion Value = Conversion ratio X Current Stock price

= 40 shares X $24
= $960
In this example, the conversion price is below the face value of the bond. As such,
the investor will not convert the bond into the common stock and wait for the higher
redemption value.

Perpetual Securities
These are hybrid securities that combine the features of both debt and equity.
Typical features are:

1. They do not have a maturity date.

2. The issuer may, but is not obliged to, redeem the perpetual securities. 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 therefore be exposed to market price fluctuations and liquidity risks.
3. Under certain conditions, it is also possible for the issuer to defer the coupon
payments.
4. In the event of a winding up of the issuer, holders of perpetual securities
normally rank ahead of ordinary shareholders but behind other creditors for
the return of the issuer’s assets.

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