Which bonds to buy in Singapore?
10 months ago forexsimulation Comments Off on Which bonds to buy in Singapore?
The bond market in Singapore is constantly evolving with the rapid growth of financial markets around it. Bonds are debt instruments, which means they promise to pay money over time. They are typically traded on the open market, and you can buy them at two basic prices:
- Face value – or 100% of the value of the bond (sometimes called “par”) and
- Premium over par (which can be as much as 15%), but you might also get less than 100% if you buy bonds that have been discounted by an investor who wants to sell below par value.
Many investors choose to hold bonds until maturity, when they receive their full investment back plus interest. Still, they may prefer to sell before then for various reasons. For example, if interest rates have fallen since buying the bond, they may profitably sell it.
What are bonds?
Bonds are typically issued by governments (sovereign bonds), companies (corporate bonds) or supranational organisations such as the World Bank. Sovereign bonds are considered the safest type of bond investment because they are backed by the full faith and credit of the issuing government. Taxpayers will always be available to repay the debt even if the company or organisation goes bankrupt.
In contrast, corporate bonds are riskier because there is a higher chance that the company will not repay its debts. Supranational bonds are backed by multiple governments but may still be riskier.
Types of bonds
Although all bonds are essentially the same, there are different types of bonds with varying terms and conditions. The two main categories are sovereign bonds and corporate/private sector bonds.
Governments issue sovereign bonds to finance their spending requirements. It is usually considered a safe asset class because it is backed by taxpayers money, hence the lower probability of default compared to other sectors such as corporate or supranational sectors, which have higher levels of risk involved in them.
On the other hand, corporate bonds are typically issued by private companies to finance various projects either within the company itself or for specific projects that require funding over time. These may range from small scale privately owned firms to large transnational corporations whose market capitalisation may be much larger than that of many countries (and hence the risk involved in investing in these companies is also much higher).
How do you choose which bonds to invest in?
When it comes to choosing which bonds to buy, there are various factors you need to consider.
The most important consideration is the risk involved in the investment. Bonds that are considered safe, such as sovereign bonds, offer lower rates of return than those that are riskier, such as corporate bonds.
Long-term or short-term
You also need to consider the bond’s term, as longer-term bonds offer higher yields than short-term ones but come with more risk.
In addition, you should consider the bond’s liquidity, in other words, how easily you can sell it if you need to. Bonds traded on the open market are more liquid than those that are not and typically have a higher price tag.
Tenure of the bond
Finally, you should look at the tenure of the bond and your ability to hold on to it. Investors can only redeem some bonds after a certain number of years, and if interest rates have fallen since you bought them, you may not get back as much as you had hoped.
It is essential for retail investors not to look at only one aspect, such as yield when choosing investments. Instead, they must consider several other aspects such as liquidity and bond type that meet their needs and requirements. If you need help deciding which bond to invest into, connect with a reputable online broker from Saxo Bank.