Bonds

Why Trade Bonds with POEMS?

What is a Bond?

A bond functions as a loan between a bond buyer (lender) and a bond issuer (borrower, typically a corporation or governmental entity). The owners of bonds are debtholders, or creditors, of the issuer. The investor agrees to give the borrower a specific amount of money for a specific period of time in exchangefor periodic interest payments at designated intervals. When the loan reaches its maturity date, the investor’s loan is repaid.

Bonds can be bought or sold before they mature, and many are publicly listed and can be traded with a broker. Many corporate and government bonds are publicly traded; others are traded only over-the-counter (OTC) or privately between the borrower and lender.

What Is The Purpose Of Bonds?

Issuing bonds is one way for companies or governments to raise funds. Such funds can be used to finance projects and operations, to invest in growth opportunities or to refinance existing debt. Bonds allow individual investors to lend money to such borrowers. Bonds provide a solution by allowing many individual investors to assume the role of the lender.

There are several reasons why borrowers may choose to issue bonds. Firstly, the interest rate companies pay bond investors is often less than the interest rate they would be required to pay to obtain a bank loan. This is more prevalent during periods of low interest rates, allowing companies to issue bonds with lower coupon rates, thus reducing their interest expenses. Secondly, issuing bonds also gives companies significantly greater freedom to operate as they see fit because it releases them from the restrictions that are often attached to bank loans. Consider, for example, that lenders often require companies to agree to a variety of limitations, such as not issuing more debt or not making corporate acquisitions until their loans are repaid in full.

The problem that large organizations run into is that they typically need far more money than the average bank can provide.

How To Trade Bonds

In this guide, you’ll learn the steps on how to trade bonds with Phillip Securities. This pertains to the buying and selling of wholesale bonds, which are Over-The-Counter investment products not listed on an exchange, but rather bought and sold between different counter parties directly. As such, the process of trading wholesale bonds is different from stock trading, and we’re here to help you through this process.

As an overview, we’ll run through the steps of opening a trading account, getting bond quotes, place bond trades, and lastly managing settlement and payments.

Step 1: Opening A Trading Account

Before you’re able to trade bonds, you’ll first need a trading account to transact. Open an Account now or check out our Account Opening guide here

Step 2: Viewing Bond Quotes

After your POEMS account has been set up and you’re able to log in, you may start your search for the right bond at the right price. We offer a number of ways for you to view wholesale bond quotes, both online and offline. However, due to being OTC, all bond quotes will be indicative in nature due to absence of an exchange.

For investors seeking a convenient bond quote search process, you may view quotes online via the POEMS platform or through our bonds website.

1. Viewing Quotes Online On POEMS 2.0

Step 1: Log in to POEMS 2.0.
Step 2: Go to the bonds tab in either Prices (LP1) or Trade (LP2)
Step 3: Acknowledge the Accredited Investor disclaimer, required as bonds are an OTC product
Step 4: Search for an issuer via the dropdown or a specific bond via the search bar
Step 5: View indicative bid ask prices
Step 6: View trade details by the trade window (right click on the bond and select trade) – estimated settlement amount, accrued interest, indicative yield

2. Viewing Quotes On our website

Check out our Bond Screener and search for a bond to view details.
You can also calculate trade details via the bond calculator – estimated settlement amount, accrued interest, indicative yield.

3. Getting Quotes Offline

For a more personal approach to your bond search, you may contact your respective financial advisor or our bond desk for quotes. Drop our customer care hotline a call to retrieve your financial advisor’s contact if required. You may contact our bond desk at 6212 1818 or bonds@phillip.com.sg.

Step 3: Placing A Bond Trade

Once you’re satisfied with your bond search and are happy with a quote, you may now be deciding to place a trade. Once again, we offer both online and offline trading options when placing bond trades.

Online bond trades can be placed on our POEMS 2.0 platform.
From the Bonds tab in Prices (LP1) or Trade (LP2), right-click on the specific bond and select Trade.

The Trade window should then appear as below. You may now key in your order whether to buy or sell, desired indicative price, and your password to proceed.

Once the order is successfully placed, you may view its status under the order status tab. You may amend or withdraw your order here as well.

For offline trades, you may contact your respective financial advisor or our bond desk at 6212 1818 to place your order. Placing subscriptions for new bond issues have to be done through these channels as well.

Step 4: Settlement and Payment

Prior to bond purchases, the purchase amount of funds should be deposited into your trading account before placing the trade. Post-funding arrangements may be explored on a case by case basis. Kindly contact your financial advisor for assistance.
Alternatively, find out how you may purchase bonds without additional cash outlay with Bond Financing.

Visit our payment page to find out more about the accepted payment methods.

Key Features of a Bond

Face value

Also called the nominal or principal value of a bond, it is the amount your will get back from the issuer on the day the bond matures. Singapore Dollar bonds are mostly issued with face value of S$250,000 per bond. When a bond is trading on the secondary market, its price may fluctuate above or below the face value.

Maturity date

The date when the bond comes due and you receive your principal amount back.

Coupon rate

The rate of interest that the bond pays the bondholder in a year based on the face value. For example, a 5% coupon bond pays the bondholder S$12,500 a year.

Yield to maturity

The expected annual return on a bond if the bond is held to maturity. It is inversely related to the bond price, which means the higher the price the bond is purchased at, the lower the yield the bondholder receives.

Types of Bonds

Bonds Types by Issuer

Corporate Bonds

Corporate bonds are bonds issued by companies. Companies issue bonds rather than seek bank loans for debt financing in many cases because bond markets offer more favorable terms and lower interest rates.

Government Bonds

Government bonds are bonds issued by governments such as the Singapore government or the U.S. Treasury. Such bonds issued by national governments may be referred to as sovereign debt and are characterized as the safest bonds, with the lowest interest rate. Backed by the “full faith and credit” of the sovereign government, these types of bonds are often referred to as risk-free.

Bond types by structure

The more common types of bond structures we have in Singapore include:

Bullet Bond

Bonds that pay periodic fixed coupon payments based on a fixed or floating coupon rate and the final principal amount at maturity

Perpetual Bond

Bonds that have no maturity date. Normally, these bonds contain a provision that gives the issuer the right to call (buy back) the bond before its maturity date, similar to the call provision of some preferred stocks. A company is likely to exercise this call right when its outstanding bonds bear interest at a much higher rate than the company would have to pay if it issued new but similar bonds.

Retail Bond

Bonds that are listed and investors are able to buy/sell on the exchange. They are normally traded in a smaller size as compare to the Over-The-Counter (OTC) bonds. However, prices quoted on the exchange are ‘dirty’ prices (including accrued interest) whereas for OTC bonds, prices are normally quoted as ‘clean’ prices. If you have a Phillip Securities Trading Account, you may login to the POEMS 2.0 Trading Platform to trade exchange traded bonds.

Other types of bond structures include:

Zero-coupon Bond

Zeros pay no regular interest. They are issued at a substantial discount to par value, so that the interest is effectively rolled up to maturity. The bondholder receives the full principal amount on the redemption date.

Convertible Bond

A convertible bond may be exchanged for shares of stock of the issuing corporation at the bondholder’s option. These bonds have a stipulated conversion rate of some number of shares for each bond. Although any type of bond may be convertible, issuers add this feature to make risky debenture bonds more attractive to investors.

Bonds with Stock Warrants

A stock warrant allows the bondholder to purchase shares of common stock at a fixed price for a stated period. Warrants issued with long-term debt may be nondetachable or detachable. A bond with nondetachable warrants is virtually the same as a convertible bond; the holder must surrender the bond to acquire the common stock. Detachable warrants allow bondholders to keep their bonds and still purchase shares of stock through exercise of the warrants.

Exchangeable Bond

These allow for exchange to shares of a corporation other than the issuer.

Fixed Rate Bond

These have a coupon that remains constant throughout the life of the bond. A variation is stepped-coupon bonds, whose coupon increases during the life of the bond.

Floating Rate Notes

Also known as FRNs or floaters, these have a variable coupon that is linked to a reference rate of interest, such as the SIBOR.

Understanding Bond Rankings

Bond ranking determines the priority of payout during the event of default, which determines our recovery rate for our bonds. Here is the order of ranks that bonds mainly have:

Secured corporate bonds

At the top of the ranks are the senior secured debt, which are bonds backed with collateral. They have significantly higher recovery rate in the event of default. Issuers of secured bonds may use assets such as properties, industrial equipment or factories as security for the bonds.

Senior unsecured bonds

Similar to senior secured debt, senior unsecured bondholders are given priority in payout during defaults, however their bonds are not guaranteed by a specific collateral.

Junior, subordinated bonds

Ranked after senior debt are junior, subordinated bonds. They are paid out from what assets remain after senior securities have been paid. There are no collateral guarantees for these bonds and they only have the issuer’s good name and credit rating as security.

Guaranteed and insured bonds

Instead of being backed by collateral, these bonds are backed by a third party. Common examples of these bonds are municipal bonds backed by a government entity or corporate bonds backed by a group entity. In the event the issuer has trouble making payouts, the third party will step in to fulfil the bond obligations. The bond is as safe as the credit rating of the issuer and the third party, thus is not 100% insured.

Convertible bonds

These bonds have the option of converting into common stock shares at a preset price. This provides bondholders with more options depending on the issuer’s prospects and stock price.

Risks

Credit risk

Credit risk is the risk of payment default of the coupon, and even the principal amount if the issuer has problems meeting its contractual obligations. This is also known as default risk or issuer risk.

Foreign exchange risk

Foreign exchange risk is the risk investors are exposed to when they trade in bonds that are denominated in a currency other than the functional currency of the investor caused by fluctuations in foreign exchange rates. This may erode the returns on the bond investment.

Liquidity risk

Liquidity risk is the risk of having a lack of buyers or sellers in the market, which may lead to the investor not being able to execute the trade or may be forced to trade at a value significantly away from the investor’s desired price. This can be deemed as liquidity risk.

Market risk

The value of the bond is subjected to interest rate changes, as well as demand and supply forces. Bonds, in particular, are sensitive to interest rate fluctuations and the prices of bonds move in opposite direction with interest rates. However, this risk is more pertinent if the investor decides not to hold the bond to maturity. Bonds may be packaged with guarantee security.

Bond Terminologies

Terminology
A
Angel Bonds	Bonds which have credit rating of either Baa3 to Aaa (Moodys), BBB- to AAA (S&P) or BBB- to Aaa (Fitch), or known as Investment grade bonds
Ask price	Price which investor acquire the bonds
Ask Yield	Yield that the investor received at the price that they invest in the bonds
B
Bid Price	Price which client is able to sell the bonds
C
Call date	Date where the issuer is able to call back the bonds in part or in full
Change of Control	A type of bond covenant which gives the bondholder the right to sell back the bonds to the company at a certain price when there is a change in ownership
Credit Rating	The credit worthiness of corporate bonds, normally done by the credit rating companies
D
Default	The failure or inability of an issuer to pay coupons and/or bond principal.
Discount	Purchasing the bond at a price less than the face value.
F
Face Value	The nominal value or the dollar value that the investor received at maturity. However, the nominal value might not be the price the investor has to pay
I
Investment-Grade	Bonds which have credit rating of either Baa3 to Aaa (Moodys), BBB- to AAA (S&P) or BBB- to Aaa (Fitch)
J
Junk Bonds	Bonds which have credit rating below Ba1 (Moodys), BB+ (S&P) or BB+ (Fitch)
P
Premium	Buying a bond at price higher than the face value
Price	The price paid to buy/sell a bond, normally expressed as a percentage to the face value
Principal	The nominal value or the dollar value that the investor received at maturity. However, the nominal value might not be the price the investor pays
R
Re-Fix coupon rate feature	A special feature of some bonds, which allow their coupon rate to be re-fixed in the future
Y
Yield	The annualised return the investor expects to receive from investing in a bond. A simple formula would be yield = coupon rate/price
Yield to Maturity (YTM)	The annualised return the investor expects to receive from investing in a bond when they hold to maturity
Yield to Next Call (YTNC)	The annualised return the investor expects to receive from investing in a bond when the bond is called back by the issuer