Overview of what is a bond and why they are seen&n |
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● 张美霓 Flavia Cheong
A bond is a long term debt security. It represents debt
because the investors ac-tually lend the face amount to the
bond is-suer. However, unlike loans, bonds can be traded in
the open market, ie. the investor need not hold it to
maturity or suffer a pe-nalty should he choose to sell the
bond.
A typical bond (plain vanilla) specifies:
－the amount of the loan. The face a-mount or par value
is the amount that the bond issuer has agreed to repay. A
typical face amount is S$1,000 for bonds issued by the
Singapore government;
－a fixed date when the principal is due. The date on
which the principal is required to be repaid is called the
maturity date;
－if the bond is secured by a collateral. Investors of
the Orchard 300 bond issued by Hallgaden Investment Pte Ltd
( a joint venture between Singapore Press Holdings and Lum
Chang) have the first legal mort-gage rights to The
Promenade, a commer-cial property at the heart of Orchard
Road.
-The contractual amount of interest which is paid out
either every six months or annually. The coupon rate is
deter-mined largely by market conditions at the time of the
bond’s sale. Once determined, it is set contractually for
the life of the bonds. However, some bonds have interest
rates that fluctuate during the life of the bond, usually at
a spread over a reference rate. These are called variable
rate bonds or floating rate notes (FRN).
One example of a fixed rate bond is the Singapore
Government Bond 4.5% 03/00, the issuer is the Government of
Singapore, the interest payable is 4.5%. The SGB’s coupon
is payable on a semi-annual basis, i.e. the Singapore
Government will pay the investor 2.25% of S$1,000 or $22.40
every six months. The government promises to repay the
principal in March 2000 to the investor. On the other hand,
the DBS Land 4/00 FRN pays a coupon of 35 basis points over
the 6 months Singapore dollar swap rate, where the reference
rate is fixed every six months and the principal is due on
April 2000.
Prior to the early 1980s, the bond market was comprised
mainly of ’plain vanilla’ bonds with simple cashflow
structures, where coupon payments and maturity were fixed at
the outset. But since then, the market has progressed, and
many securities in the bond market have options embedded in
them. Examples include securities such as "callable bonds"
and "puttable bonds". The former offers the issuer the
option to redeem the bonds at an earlier date, and in this
case, the investor is usually paid a pre-mium over the par
value to compensate for the inconvenience. Suppose interest
rates have fallen substantially since the bond was issued,
then it would pay the issuer to redeem the bonds early and,
at the same time, sell a new issue with a lower coupon rate.
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