How To Invest In Corporate Bonds – Bonds and fixed income instruments. A step-by-step guide to bond investing in Singapore Everything you need to know to make your first bond investment
Along with stocks, real estate and bank deposits, bonds have always been one of the traditional asset classes that investors consider for inclusion in their investment portfolios.
- 1. How To Invest In Corporate Bonds
- 2. Beginners Guide To Fixed Income Plans, Tutorial For Beginner Investors
- 3. What Are Corporate Bonds And How Do They Work?
How To Invest In Corporate Bonds
Bonds are debt obligations issued by organizations and companies to investors. Investing in bonds means owning debt from the bond issuer. The bond issuer will make regular interest payments to you, the investor, until the bond matures, when the issuer is legally obligated to repay the principal.
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In the past, these bonds were not available in Singapore to retail investors due to the minimum investment usually required. However, the number of bond issues targeting retail investors has increased over the past decade.
With more options, retail investors in Singapore can now include bonds in their investment portfolios. But how can people start investing in bonds?
Before you start investing in bonds, you need to know the most common types of bonds you can invest in.
These are bonds issued by the Singapore government. These include Treasury Bills (T-Bills), SGS Bonds and Singapore Savings Bonds (SSBs). These bonds are backed by the Singapore government and can be considered risk-free.
Investing In Bonds
Unlike SGS, corporate bonds can vary significantly in risk depending on the issuing corporate entity. In general, the risk of corporate bonds can be determined by analyzing the company’s financial condition so that investors can see how well the company can meet its bond obligations. Some investors may rely on a bond’s credit rating (if available) to determine the bond’s riskiness.
If two bonds pay the same interest rate, a smart investor will choose the company with the stronger fundamentals. Therefore, entities that issue bonds that are considered riskier must offer higher interest rates to attract investors.
Of course, the safest bonds issued by the best companies today can last for a long time. This is because corporate organizations operate in a constantly changing business environment. A company that is very profitable today may become less profitable or even unprofitable in the future. This, in turn, will affect the quality of the connection.
Investors can invest in a basket of bonds through bond ETFs. The beauty of investing in bond ETFs is that you enjoy a diversified portfolio of bonds without having to buy them outright or consider reinvesting cash flows from maturing bonds.
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ABF Singapore Bond Index Fund is one of the bond ETFs listed on the Singapore Exchange (SGX). This ETF, managed by Nikko Asset Management, invests in high-quality bonds issued by the Singapore government and quasi-Singapore government entities.
Once you understand the different types of bonds available in Singapore, you can consider investing in one or more.
Some investors believe that bonds are an asset class that is inaccessible to retail investors. That’s not true. Even with a few hundred dollars, investors can start investing in some bonds in Singapore.
The bonds listed above are available for purchase to all retail investors. There are also some bonds that are only available to accredited investors.
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An example of such a bond is the Astrea III PE Bonds, Singapore’s first public private equity bond. Astrea III PE bonds are backed by cash flows from a portfolio of various private equity funds in which Astrea III subsidiaries have invested. Astrea III’s parent company, Azalea Asset Management Pte. Ltd., is a subsidiary of Temasek Holdings (Private) Limited.
Astrea III’s PE bonds were launched on SGX in July 2016 and the A-1 bonds are rated ‘A+sf’ and ‘A+ (sf)’ by Fitch and S&P.
* Credit rating companies use the ‘sf’ indicator for ‘structured finance’ instruments. The “sf” prefix does not change the rating definition.
Unlike investing in stocks or real estate, most bonds have a limited lifespan. This is also known as maturity.
Fixed Income Securities
Ideally, the maturity of the bonds you invest in should align with your own investment horizon. For example, if you need to use money that has been invested over five years, it makes sense for you to invest in bonds that mature in five years as opposed to bonds that mature in 20 years.
Unlike stocks, which can be easily bought and sold on the stock market, bonds tend to be less liquid. So, before investing in bonds, you should check the liquidity of the bond to see if it could be a problem in the future if you need to sell it quickly.
For some bonds, such as Singapore Savings Bonds, liquidity is not an issue because the government has guaranteed that your bond investment can be redeemed at any time with a guaranteed principal.
Listed and unlisted corporate bonds can be traded through exchanges where the bonds are listed and the over-the-counter market. However, there is no guarantee that you will be able to receive the full amount of your investment, as bond values may fluctuate depending on market conditions. Also, like stocks, bonds can only be sold on the stock exchange if there are other buyers willing to buy them.
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Some investors are attracted to bonds because they see less risk. This statement is not entirely true. Bonds are generally less risky than stocks
For example, when comparing shares and bonds issued by DBS, it is fair to say that the bonds issued are likely to be less risky.
However, if we compare the shares of one company with the bonds of other companies that are of lower quality and have a higher risk of default, this may not be true.
If you take on more risk by investing in corporate bonds with weaker fundamentals, you should expect higher returns.
What Are Corporate Bonds? Benefits, Risks, And How They’re Rated
As an investor, you should consider your level of risk tolerance before investing in bonds, and do not automatically assume that all bonds are safe and, as a result, invest in bonds that give you the highest return and also the riskiest. .
A well-constructed portfolio should include both stocks and bonds. Stocks offer volatility, allowing investors to increase the value of their portfolio quickly during good times. Bonds, on the other hand, tend to be less volatile and can provide stability in difficult times, while providing good value through regular interest payments.
By having the right bond allocation in your portfolio, investors can enjoy the best of both worlds.
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Where To Buy Bonds
Lifehacks: 7 Platforms in Singapore to Buy Pre-Favorite Items So You Can Save Land and Money While Shopping Economic factors that affect corporate bond yields are interest rates, inflation, yield curves, and economic growth. Corporate bond yields are also influenced by the company’s own metrics, such as credit ratings and industry sectors. All these factors affect corporate bond yields and influence each other.
The price of corporate bond yields is a multivariate dynamic process that is always under competitive pressure.
Economic growth, usually measured by GDP growth, is positive for companies because it leads to increased profits and profits for companies, making it easier for them to borrow money and debt services, which leads to a reduction in default risk and, in turn, less yield .
However, prolonged periods of economic growth pose risks of inflation and upward pressure on wages. Economic growth leads to competition for labor and reduces overcapacity.
What Are Corporate Bonds And How Do They Work?
Higher wages as inflation begins to reduce the rate of return, making it more vulnerable to lower economic growth. Inflation also raises the price of goods in the economy in general, and when goods become more expensive, the ability to pay increases, and therefore credit risk increases—a positive pressure on yields.
Inflation risks also pressure the central bank to raise its target interest rate. As the risk-free rate of return rises, corporate bond yields must also rise to compensate. Higher yields increase costs, creating greater vulnerability to economic downturns.
Thus, yields can rise sharply as costs rise if the economy slips into recession and incomes fall; investors start to assess the increased possibility of default.
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