Overview of what is a bond and why they are seen&n |
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The end result, interest savings for the issuer. A
puttable bond is a plain vani-lla bond with an option for
the investors to sell or put the bond to the issuer at a
date before maturity. Investors usually put a bond back to
the issuer when they think that the money invested could be
better used elsewhere.
Convertible bonds gives investors the option to convert
their corporate bonds into company stocks instead of getting
a cash repayment. The terms are set at issue, they include
the date the conversion can be made and how much stock each
bond can be exchanged for. The conversion option usually
lets the issuer offer a lower initial interest rate and
makes the bond price less sensitive than conventional bonds
to changes in the interest rate. Exchangeable bonds are the
same except that the option is to convert to another
entity’s stocks. For example, Fullerton Global’s 2003 zero
coupon bond is exchangeable into Singa-pore Telecom shares.
Other variations of the plain vanilla bonds include zero
cou-pon bonds which does not pay out interest but interest
accrues and is paid in a lump sum at maturity.
A major appeal of investing in bonds is that they
provide investors with a steady stream of income and barring
defaults, guarantees the repayment of the loan in full at
maturity. For the conservative investors, bonds also
provide greater protection. E-quity investors are the last
in line of all those who have a claim on the assets and
income of the corporation. In a liquidation of the firm’s
assets, bondholders and other creditors will have to be paid
first. For a firm not in liquidation, shareholders have
claim to part of the operating income left over after taxes
and interest to bond hold-ers have been paid. For secured
bonds, in-vestors have the legal right to the asset that has
backed the bonds. Some bond cove-nants provide further
protection to the in-vestors by stipulating that the bonds
can be put back to the issuer in the event the ma-jority
shareholder sells down his stake or when certain financial
ratios, eg. debt to e-quity ratio, breach a set level.
Bonds can also be exciting with scope for capital
appreciation. Take for instance a fall in interest rates,
in this case bonds which were issued when interest rates
were high will become increasingly valuable and as the bond
price rises, this provides profit for bond sellers.
Investors can also ’’stock pick’’ as they do in the
equity market. Bonds do get mis-priced and investors who
can pick this up can gain substantially. When sentiment
towards Asia was at its low last year, the Petronas 2006 US$
bond was trading at a huge spread of 1,200 basis points over
the equivalent U.S. treasury, and since then the spread has
narrowed as fears over a possi-bility that the Malaysian
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