Variable-Interest Bonds

Variable-Interest Bonds

When it comes to investing, bonds have always been a popular choice for individuals seeking a stable and predictable income stream. Among the various types of bonds available, variable-interest bonds stand out as a unique investment instrument that offers flexibility and the potential for increased returns. Variable-interest bonds offer a unique investment opportunity for investors seeking flexibility, potential for enhanced returns, and protection against rising interest rates. By understanding the working, importance, and examples of variable-interest bonds, investors can make informed decisions aligned with their investment goals and risk tolerance.  

What are variable-interest bonds? 

Variable-interest bonds, also known as floating-rate bonds, are a type of debt instrument that provide interest payments that can fluctuate over time. Unlike traditional fixed-interest bonds, where the interest rate remains constant throughout the bond’s life, variable-interest bonds offer interest payments that are linked to a reference rate, As these reference rates change, the interest payments on variable-interest bonds adjust accordingly. This feature makes variable-interest bonds an appealing option for individuals seeking stable and predictable income streams while still being responsive to interest rate movements. 

Understanding variable-interest bonds

Variable-interest bonds are designed to provide investors with a hedge against interest rate fluctuations. When interest rates rise, the interest payments on these bonds increase, thereby protecting investors from losing out on higher returns. Conversely, when interest rates fall, the interest payments on variable-interest bonds decrease, which can be advantageous for investors seeking to capitalise on declining interest rates. 

These bonds typically have a specified spread or margin above the reference rate, which determines the interest rate paid to bondholders. For example, a variable-interest bond with a spread of 2% above LIBOR will yield an interest rate equal to the prevailing LIBOR rate plus 2%. This spread acts as a premium for taking on the risk associated with the variable interest payments. 

Working of variable-interest bonds 

The working of variable-interest bonds is based on a dynamic interest rate structure that adjusts periodically, providing investors with flexibility and potential returns that align with market conditions. Variable-interest bonds function based on a predetermined formula that calculates the interest payments at specified intervals, such as quarterly or semi-annually. The formula involves adding the reference rate to the predetermined spread to determine the bond’s interest rate for the payment period. 

The frequency at which the interest rate is adjusted varies depending on the bond’s terms and conditions. There is typically a reset period during which the interest rate is recalculated based on the prevailing reference rate. This can range from as short as one day to several months, depending on the specific bond. 

It is important to note that variable-interest bonds typically have a reset period, during which the interest rate is recalculated based on the prevailing reference rate. This reset period can range from as short as one day to as long as several months, depending on the bond’s terms and conditions. 


Importance of variable-interest bonds 

  1. Protection against rising interest rates: Variable-interest bonds offer investors a way to safeguard their income from the negative effects of rising interest rates. As interest rates increase, the interest payments on these bonds rise accordingly, ensuring that investors receive higher returns compared to fixed-interest bonds. 
  2. Potential for enhanced returns: In a low-interest-rate environment, variable-interest bonds can provide an opportunity for higher returns when interest rates eventually rise. As rates increase, the interest payments on these bonds also rise, potentially outperforming fixed-interest bonds over time. 
  3. Diversification: Including variable-interest bonds in an investment portfolio can provide diversification benefits. Their performance is often uncorrelated with other asset classes, such as stocks or fixed-interest bonds, making them a valuable addition for risk-conscious investors looking to balance their portfolios. 


Examples of variable-interest bonds 

Variable-interest bonds offer investors the opportunity to benefit from changing interest rates, providing flexibility and potential for increased returns. Some examples are: 

 1. US Treasury Inflation-Protected Securities (TIPS) 

TIPS are a type of variable-interest bond issued by the US Treasury. They offer investors protection against inflation by adjusting the principal value of the bond and the interest payments based on changes in the Consumer Price Index, or CPI. This adjustment ensures that the purchasing power of the bond’s future cash flows is maintained, making TIPS an attractive investment during inflationary periods. 

2. Singapore Savings Bonds (SSB) 

SSBs are a type of variable-interest bond issued by the Singapore government. They provide retail investors with a safe and flexible investment option. The interest rates on SSBs are reviewed and adjusted every six months, allowing investors to benefit from changes in interest rates over time. SSBs offer attractive yields compared to traditional savings accounts and can be a suitable choice for Singaporean investors seeking low-risk investments. 


Frequently Asked Questions

Interest on traditional bonds is typically fixed, meaning it remains constant throughout the bond’s life. However, variable-interest bonds offer interest payments that can fluctuate based on changes in a reference rate, providing investors with more flexibility. 

Variable-interest bonds offer protection against rising interest rates, potential for enhanced returns, and diversification benefits. These advantages make them appealing to investors looking to mitigate interest rate risk and seek higher yields. 

One potential disadvantage of variable-interest bonds is the uncertainty surrounding future interest payments. As interest rates fluctuate, the income generated by these bonds can be unpredictable. Additionally, variable-interest bonds may carry higher credit risk compared to fixed-interest bonds.

A variable-rate demand bond is a type of municipal bond that allows investors to demand repayment of the bond’s principal at periodic intervals. The interest rate on these bonds is typically reset at predetermined intervals, providing investors with flexibility and liquidity. 

The choice between variable and fixed interest depends on an investor’s risk appetite, investment objectives, and market conditions. Variable interest can offer potential benefits during periods of declining interest rates or inflation, while fixed interest provides stability and predictability. It is important for investors to evaluate their individual circumstances before making a decision. 




    Read the Latest Market Journal

    Financial Sectors Thriving: Top Traded Counters in April 2024

    Published on May 21, 2024 31 

    At a glance: The Federal Reserve (Fed) held interest rates steady at 5.25% to 5.5%...

    One Dollar at a Time: The Potential of Fractional Shares

    Published on May 20, 2024 49 

    Table of contents 1. Introduction 2. Dollar-Cost Averaging 3. Popularity of Dollar-Cost Averaging 4. Small...

    Unit Trusts vs Exchange Traded Funds (ETFs) – Which is better for your portfolio?

    Published on May 20, 2024 47 

    Imagine you are dining at a nice restaurant, feeling overwhelmed by the variety of seemingly...

    Weekly Updates 20/5/24 – 24/5/24

    Published on May 20, 2024 18 

    This weekly update is designed to help you stay informed and relate economic and company...

    What is CFD? With 2 Practical Examples

    Published on May 15, 2024 102 

    In this article, you will learn what CFD (Contract for Difference) is, the costs and...

    What is ESG investing, and why is it important?

    Published on May 15, 2024 96 

    Over the last five years, Environmental, Social, and Governance (ESG) investing has evolved from being...

    What are fixed-income funds?

    Published on May 15, 2024 51 

    In the diverse world of unit trusts, various funds employ distinct investment strategies aligned with...

    Hong Kong Value Stocks Q2 2024

    Published on May 14, 2024 124 

    After a long period of sluggishness, Hong Kong market has begun to pick up. The...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you


    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  


    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066