Selecting a Bond
Types of Bonds & How to Assess Credit Risks
Investment26 Feb 2024
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Types of Bonds

Traditional bonds

Traditional bonds

These have fixed coupon payments and maturities. They can be issued by companies or governments. Bonds issued by companies are commonly known as Corporate Bonds or Credits. Government bonds in Hong Kong are known as iBond, Silver Bonds etc.. In the US, they are called Treasury Bonds.

Within these two broad classes of traditional bonds, there are different sub-categories classified by their credit quality and geography. These include investment grade bonds, speculative grade bonds, and emerging market bonds.


Perpetuals

Perpetuals

A hybrid between a bond and a stock, also known as a ‘perp’. It offers fixed income but has no maturity date. That means the issuer has no obligation to pay the investor the principal at a specific date. So, investors usually can only get their funds back by selling the bond on the market at the prevailing price at the time.

Some perpetuals may be called back (redeemed) but this is at the discretion of the issuer.


Zero coupon bonds

Zero coupon bonds

No fixed coupon component but issued at a discount to the par value or amount repayable by the issuer on maturity. These bonds appreciate in value as they approach maturity.

How to Assess Credit Risks?

Where available, credit ratings are guides to credit quality. The higher the credit rating, the stronger the financial standing of the bond issuer in the eyes of the ratings agency. Different credit ratings agencies use different ratings system.

A widely followed agency Standard & Poor uses the following system:

A widely followed agency Standard & Poor uses the following system

However, an unrated bond does not mean that the issuer is of poor financial standing. In some cases, the issuing company is so confident that its bonds will sell on the company’s brand name or reputation and does not want to put resources towards getting a credit rating.

In such an instance, unless you are able to assess the non-rated issuer’s balance sheet, earnings, cash flow situation and outlook yourself, you are taking on the risk of lending only on the basis of reputation, which may or may not be indicative of actual credit quality.

 

Risk Disclosure and Important Notice

The information herein is for information only. DBS accepts no liability whatsoever for any direct, indirect or consequential losses or damages arising from or in connection with the use or reliance of this publication or its contents

Investment involves risks. The information provided is based on sources which DBS Bank Limited and DBS Bank (Hong Kong) Limited believe to be reliable but has not been independently verified. Any projections and opinions expressed herein are expressed solely as general market commentary and do not constitute solicitation, recommendation, investment advice, or guaranteed return. The above information does not constitute any offer or solicitation of offer to subscribe, transact or redeem any investment product. Past performances are not indicative of future performances. You should make investment decisions based on your own investment objective and experience, financial situation and particular needs. You should carefully read the product offering documentation, the account terms and conditions and the product terms and conditions for detailed product information and risk factors prior to making any investment. If you have any doubt on this material or any product offering documentation, you should seek independent professional advice.

Bonds are investment products and some of them may involve derivatives. The investment decision is yours but you should not invest in the products unless DBS Bank (Hong Kong) Limited who sells them to you has explained to you that the products are suitable for you having regard to your financial situation, investment experience and investment objectives.

The information provided above have not been reviewed by the Securities and Futures Commission of Hong Kong or any other regulatory authority in Hong Kong.

 

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