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Investing in bonds generally
provide a high degree of safety with regular, predictable, scheduled
payments over the life of the security. However, most of us have doubts
about the bonds investment and would ask the following questions:
1. What are bonds?
Bonds are debt issued by governments and companies in order to raise money,
and are a relatively safe investment. Bonds are usually seen as a long-term
investment and can have terms of up to 30 years, although five to 10 years
is the normal investment period.
2. Are bonds principal protected instruments?
Strictly speaking, they are not. Investors are always subject to the credit
risk of the issuer, notwithstanding that be a AAA rated issuer. However, the
merit of bonds vs equities is that investors are only subject to the default
risk of the issuer should the investor prefer to buy and hold investments.
Of course, if investor trades before maturity, he will be subject to market
risk.
3. Are bonds liquid investment instruments?
There is a well-developed secondary market for fixed income instruments
globally and most investment grade bonds. Most of the Bond Agents or Dealers
has professionals in Hong Kong, Tokyo, Paris, London and New York
specialising in trading different types of Bonds.
However, liquidity is always subject to market conditions, eg economic and
political events, limits on specific issues, etc and issue size. Hence, a
US$200 million bond issue would be less liquid than a US$1billion issue, all
other things remaining equal. Usually government bonds are the most liquid
while structured notes are the least liquid.
Should you choose to sell bonds, lease note that it takes take T+N [please
define] for settlement of cash/scrip. The exact day depends on the type of
bond.
4. How do I benefit from bond investments?
By investing in bonds, investors can be benefit from:
Regular income - you can receive regular income as generated by the
interest paid throughout the life of the bond
Higher return - bond yields are usually higher than time deposit
rates with similar maturity
Potential capital gain - you can also benefit from capital
appreciation when bond prices move up
5. How much does it cost to invest in bonds?
The cost varies amongst service providers. Some build in margins on prices
and charge custodian fees, while others do not charge custodian fees.
However, investors must have a custodian account to hold bonds and should
have a custodian to handle settlement issues on their behalf.
6. Do I have to hold bonds until maturity?
No. You can sell your bond before it matures and benefit from capital
appreciation if the selling price is higher than the original buying price.
Some Bond Agents or Dealers will repurchase bonds that you bought through
them based on the prevailing market price under normal market circumstances.
However, the buying price offered by Some Bond Agents or Dealers may differ
from the original selling price due to changes in market conditions.
7. How can I collect my interest payments from bonds?
As all bonds purchased through Bond Agents or Dealers from bank are under
the custody and nominee services, all interest earned will be credited to
your settlement account on the coupon payment date.
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