Sep 25, 2010

What are Bonds

What are Bonds?

We use the term "bonds" to refer to corporate bonds and Singapore Government bonds. Corporate bonds and Singapore Government bonds are fixed income securities.

Fixed Income Securities refers to securities that provide a return in the form of fixed periodic payments and the eventual return of principal at maturity.

Governments issue government bonds, while supranational institutions like Singapore statutory boards, as well as companies, issue corporate bonds. Preference shares are also issued by companies.

An investor stands to earn a return from the interest payment from a Fixed Income Securities investment. The investment also has potential for capital appreciation upon disposal of the security.

An example of a Fixed Income Security is a corporate bond with a 2.5% interest rate and a 5-year maturity period.

An investor investing $1,000 in this bond would receive annual coupon payments of $25, usually paid semi-annually (twice a year), and be returned $1,000 in the fifth year when the bond matures.

Fixed income securities are offered by SGX for trading. The process of buying and selling is similar to that of a share and can be executed through any broker.

Common Fixed Income Terms

The company or government that borrows an amount of money and pays the interest.

The amount borrowed by the issuer that will be repaid to the investor at maturity. Also known as maturity value, face value, or par value.

The end of a bond, the date that the issuer must return the principal to the investor.

Interest payment made on a bond, usually paid in twice-yearly installments. A $1,000 bond paying $45 a year as a $45 coupon, or a coupon rate of 4.5%.

Treasury Bills
Short-term government securities that mature in one year or less. They are sold at a discount to the par value. Also called a T-Bill.

The return earned on a Fixed Income Security. This is obtained from the coupon rate divided by price, and expressed as an annual percentage rate.


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