## Friday, December 27, 2013

### Retail bonds listed in SGX

I'm sharing this summary of the retail bonds that are listed in sgx for those who are in the same boat as me - trying to piece up a portfolio of fixed income instruments for your own or your parent's portfolio. Those who do not know about bonds, I can share a bit here.

 Click to enlarge. I might be wrong, so do your due diligence

Crash course on bonds:

1. There's a par value for every bond. In the case of all the retail bonds listed in sgx, they all have a bond value of \$1. This is important because a bond will be redeemed by the issuer at the par value, not matter what market price you bought it at. For instance, if you bought a bond at market price of \$1.05. Upon redemption, the issuer will only pay you back \$1.00. This means that there is a confirmed loss of \$0.05 and there's no doubts about it. Conversely, if you buy a bond below par, say \$0.990. Upon redemption, you'll get a capital gain of \$0.010, on top of whatever interest you got between the time you bought and redemption.

2. A bond holder will be paid coupons (it's something like dividends). Most will pay out semi-annually (that's twice a year). So for instance, SIA 2.15%b150930 has a coupon yield of 2.15%, they will pay out 1.075% (2.15/2 = 1.075) on every end of Mar and end of Sept.

3. The coupon yield (the % that is found on the name of the bond) might not be the actual yield that you're getting, especially when you didn't buy it at par value. I prefer to calculate the actual amount of coupon payment that I will receive until redemption, then added to the capital gain/loss from the difference between the par value and the market price of the bond you had bought the bond at, then divided by the number of years to hold the bond till maturity, in order to get the % returns pa.

So, my total % returns per year = (Total coupon payments till redemption + difference in purchase price and par) / number of years till maturity

For example, LTA n4.17%160510 10k gives out interest per year at 4.17%. The maturity date can be seen from the name of the bond, given in YYMMDD. In this case, it's 10th May 2016. From now till that maturity date, there's still 2.4 years left. Since they issue the interest on end April and Oct, I would have missed the payments for 2013 already. From now until maturity, I'll have received a total of 5 payments. Hence, the total coupon payout is 4.17/2 x 5 = \$0.10425. Assuming I bought the bond at market price of \$1.065, I'll have lost \$0.065 once the bond is redeemed (the par value is \$1.000). So, my total returns is found by adding the total coupon payout plus the capital loss upon redemption, which is 0.10425 - 0.065 = \$0.039. The % returns per year = (0.039/1.065) x 100 / 2.4 = 1.55%

(Side note: I don't like to use the easier YTM or yield to maturity, because it assumes that the coupon payments are re-invested at the same rate as the current yield of the bond. Easier said than done. Anyway, I'm not re-investing the coupon, so I shall use my own common sense way of find the % returns, thank you very much.)

4. You don't really have to hold out the bond to maturity. You can sell it anytime you want by trading it off, but you'll be subjected to the buy/sell bid at the point you want to sell. Liquidity might be an issue for these instruments since they are not traded frequently. If interest rate is going to go up in the next few years, you might see the price of the bond being lower than the price you bought in. If you hold the bond till maturity, you don't really have to worry about the price of the bond in between, since you already 'locked' the capital gain/loss. I guess this worry and fuss free thing about bond is the best deal about this class of instrument. You just have to worry about whether the company can keep up with the payments. As long as it don't go bust, you're safe.

5. Bond is safer than stocks in general, but whatever guarantee is only as safe as the underlying company that issues the bond. Bear that in mind. Usually a high risk company will put up a higher bond in order for the market to 'bite'. That's why those very steady business and established companies will issue bonds with lower interest rates.

(Thanks to Lee Chin Wai who posted a comment below, I've realised I've missed out on a lot of small fine details regarding the early optional redemption of the bonds. I've made amendments in the chart posted above)

Lee Chin Wai said...

Hi La Papillion,

You might also like to consider preference shares and SGS bonds.

Also, take note that some of the bonds/ preference shares (e.g. CapitaMalls Asia 3.8%) are callable by the issuer before maturity.

Rgds,
(The) Boring Investor

la papillion said...

Hi LCW,

You're right...I wondered why I didn't see that part about cma 3.8% having a step up rate and also earlier redemption than 12-Jan-2022.. In fact, I missed out a whole part of the smaller fine but impt details. Thanks for the alert!

I'm considering pref shares and sg bonds too. I'll post it up shortly.

Actually with the possible rise in interest rates, it's more unlikely for them to redeem the bonds back, unless they have no other place to invest the cheap debt. What do you think?

Lee Chin Wai said...

Hi La Papillion,

Yes, I share your views. 3.8% (and 4.5% after step-up) is not a lot to pay for a bond, so the risk of it being redeemed before maturity is reasonably low, especially since interest rates would have gone up by then.

As an example, OCBC redeemed both its 4.5% and 5.1% pref shares this year but left the 4.2% pref shares alone. UOB also redeemed its 5.05% pref shares and issued new ones (called perpetual capital securities) at 4.90% and 4.75% recently. Both OCBC and UOB are rated AA- by S&P and Fitch, while CMA is not rated.

la papillion said...

Hi LCW,

Ya, so if things go as planned, the lower interest bearing bonds/pref shares shouldn't be redeemed early, unless they really have no use for that money so they might as well save on the interest cost on their part.

I would really like to see more developments in the retail segment in the bonds/pref shares offerings. Not those 250k min type, but those that are listed and can be traded in sgx. I think it'll give singaporeans a lot more choice to diversify into the fixed income asset class instead of relying on bond funds.

Anonymous said...

Hi LCW,
I am new to bond investment. I have a question. How do you trade the SGX listed corporate bond like the LTA bond? I have online stock trading account with a local brokerage firm, can I trade corporate bond using the same online stock trading account? Do I have to pay commission for the trade? I noticed that you didn't include commission in calculating your return on LTA bond. Thanks in advance for your time in answering my question.

la papillion said...

Hi,

Let me answer on his behalf.

You can trade sgx listed corporate bonds from your normal stocks account. Just find the counter name from sgx website (under fixed income), then trade accordingly. The commission is the same as for normal stocks.

CH said...

Does buying right before the coupon issuance date mean that the buyer would have to pay a prorated coupon to the seller of the retail bond?

la papillion said...

Hi CH,

They have a CD and XD like stocks. So if you buy while still on CD, you'll get the coupon. If you buy it on XD, you won't. So there's no point in time where the seller of the bond have to pay the coupon to the new buyer. Everything is clear cut based on CD and XD, just like normal stocks.