General

What are bonds?

Bonds are issued by governments and companies in order to raise money. Bonds are usually seen as a long-term investment and can have terms of up to 30 years, although five to 10 years is the normal investment period. Many fund managers use bonds as a stable element in unit trust products.

Bonds are a form of borrowing. They are debt securities issued by borrowers such as governments or companies seeking to raise funds from the financial markets. They are also known as fixed income securities because most bonds pay a steady stream of interest income at periodic intervals throughout the life (also known as the term or tenure) of the bond. This interest is known as the "coupon" and the coupon rate is expressed as a percentage of the principal, known as the "face" or "par" value of the bond. Bond prices are usually expressed as a percentage of face value. Upon maturity, bonds are redeemed at face value and bondholders are paid 100% of face value.

Some bonds do not offer coupons at all - these are known as "zero-coupon bonds" and are priced at a discount to their face value. At maturity, you will receive the face value (which includes the accrued interest on the note).

The yield on a bond depends primarily on the credit quality of the bond issuer. In any local market, the highest quality bonds are usually government bonds. They are usually followed by quasi-government or government linked entities, banks and then companies.

What is the relationship between Interest rates and Bond prices?

Generally, bond prices are inversely related to interest rate movements. A rise in interest rates could see a fall in bond prices. The price adjustment compensates the buyer for the coupon which is lower than comparable market rates. Similarly, if rates fall, the buyer pays a higher price for receiving a coupon that is higher than comparable market rates. Investors who choose to sell their bonds in a rising interest rate environment will suffer a capital loss if bond values are now below the price they paid. On the other hand, if investors continue holding the bond, they will incur opportunity cost as their funds could have been invested in higher yielding instruments.

Market price fluctuations may not matter as much for investors who buy and hold as they will receive interest throughout the life of the bond and principal at maturity, provided there is no issuer default. Investors in bond funds, on the other hand, may be affected by interest rate movements as these will have impact on the funds' net asset value and hence the price at which investors can redeem their units.

Why invest in bonds?

Bonds may be attractive for investors who want a source of regular income or to diversify their portfolio of investment assets. A diversified portfolio helps to reduce the risks caused by a concentration of similar assets. By including assets whose values do not always move in the same direction or by the same degree as other assets in the portfolio, you may give up some gains but also reduce some losses in your portfolio. For example, certain market conditions which do not support the price of shares, may actually be positive for bonds.

What types of bond are available through HSBC?

Bonds from HSBC can be categorised by:

  • Types of issuers: - Corporate bonds, supranational bonds and government/quasi-government bonds
  • Fixed rate bonds, floating rate coupon bonds
  • Available in multiple currencies:- USD, AUD, CAD, CNH, EUR, GBP, NZD and SGD

HSBC offers you a wide selection of investment grade and selective range of high-yield bonds with tenors of up to 30 years.

What are the pre-requisite for investing?

Some of the basic criteria are listed below:

  • Premier customers.
  • Accredited investors.
  • Passing the Customer Account Review (CAR), where applicable.
  • If this is your first time investing in bonds with HSBC, you would be required to contact your Relationship Manager to do a Goal Planner Journey and where applicable acknowledge a Risk Warning Statement.
  • However, some bonds have additional criteria; please check with your RM to ascertain how you might meet them.
  • Please note that this product is not eligible for US citizens/residents, Canadian residents and Saudi Arabian residents.

How can I trade bonds with HSBC?

If you already have an HSBC Investment Services/Securities account, you can simply contact your Relationship Manager to execute your bond order. We also offer bond trading services through our branches. To open an Investment Services/Securities account, simply visit any HSBC branch in Singapore.

Do I have to hold bonds until maturity?

No. You can sell your bond before it matures and benefit from capital appreciation if the selling price is higher than the original buying price. Under normal market circumstances, HSBC will repurchase bonds at the prevailing market price, subject to the liquidity of the bond. However, the buying price offered by HSBC may differ from the original selling price due to changes in market conditions.

What are the risks in Bonds?

Risks in investing bonds.
Risk
What this means
Default (or credit risk)
Bonds are forms of debt, so bond prices will be affected by the perceived credit quality or probability of default of the bond issuer. When an issuer defaults, you may lose all or a substantial part of your investment.
Call risks
Some bonds have a callable feature which gives the issuer an option to buy back (redeem) the bond before its maturity date. If a bond is called when prevailing interest rates are lower than at the time you bought it, you will be exposed to reinvestment risks.
Price risk and interest rate risk
Bond prices are inversely affected by interest rate movements. A rise in interest rates could see a fall in bond prices. If interest rates fall, buyers pay a higher price to receive a coupon that is higher than the prevailing market rates.
Reinvestment risk
In an environment of declining interest rates, investors may have to reinvest the income received and any return of principal at lower prevailing rates.
Exchange risk
Investing in bonds denominated in foreign currencies exposes the investor to the risks of adverse currency movements if the investor's own currency base is different.
Liquidity risk
Some bonds are less liquid than others. This may happen if the investors of a particular bond issue are largely buying to hold, so there are fewer buyers and sellers. This may make it harder to buy or sell the bonds. Even in cases where the bonds are listed or traded on an exchange, there is no certainty that a liquid secondary market will develop.
Inflation risk
This arises when the rate of inflation is higher than the bond's coupon rate. This will erode the value of your investment as the purchasing power of the bonds' coupons and principal falls.
Event risk
This is usually described in the prospectus. It can cover events that can unexpectedly erode an issuer's credit strength and ability to make good on its debt payments, for example, natural disasters, takeovers, and restructurings.
Market risk
A bond's price will fluctuate with changing market conditions, including the forces of supply and demand and interest rate changes.
Risks in investing bonds.
Risk
Default (or credit risk)
What this means
Bonds are forms of debt, so bond prices will be affected by the perceived credit quality or probability of default of the bond issuer. When an issuer defaults, you may lose all or a substantial part of your investment.
Risk
Call risks
What this means
Some bonds have a callable feature which gives the issuer an option to buy back (redeem) the bond before its maturity date. If a bond is called when prevailing interest rates are lower than at the time you bought it, you will be exposed to reinvestment risks.
Risk
Price risk and interest rate risk
What this means
Bond prices are inversely affected by interest rate movements. A rise in interest rates could see a fall in bond prices. If interest rates fall, buyers pay a higher price to receive a coupon that is higher than the prevailing market rates.
Risk
Reinvestment risk
What this means
In an environment of declining interest rates, investors may have to reinvest the income received and any return of principal at lower prevailing rates.
Risk
Exchange risk
What this means
Investing in bonds denominated in foreign currencies exposes the investor to the risks of adverse currency movements if the investor's own currency base is different.
Risk
Liquidity risk
What this means
Some bonds are less liquid than others. This may happen if the investors of a particular bond issue are largely buying to hold, so there are fewer buyers and sellers. This may make it harder to buy or sell the bonds. Even in cases where the bonds are listed or traded on an exchange, there is no certainty that a liquid secondary market will develop.
Risk
Inflation risk
What this means
This arises when the rate of inflation is higher than the bond's coupon rate. This will erode the value of your investment as the purchasing power of the bonds' coupons and principal falls.
Risk
Event risk
What this means
This is usually described in the prospectus. It can cover events that can unexpectedly erode an issuer's credit strength and ability to make good on its debt payments, for example, natural disasters, takeovers, and restructurings.
Risk
Market risk
What this means
A bond's price will fluctuate with changing market conditions, including the forces of supply and demand and interest rate changes.

What are the risks of foreign listed products?

In addition to the above risks, foreign listed products expose you to additional potential risks due to legal and regulatory differences between the foreign regime and the local regime. For example, there may be differing disclosure standards and investor protection.

Foreign exchange risk and tax liabilities may also be present. You should be aware that political, economic and social factors in the foreign country may influence the domestic market and impact the value of the investment. The extent of risks will also differ depending on the jurisdiction in which the foreign product is listed.

What are some of the charges involved?

Currently, HSBC absorbs the monthly custody fees but reserves the rights to make any changes to said fees. Customers will be informed at least 30 calendar days prior to any implementation of fees or charges. There will also be no transfer-in fees. However, there will be a transfer-out fee of USD 100 (GST charges may apply) per bond in addition to CDP charges (if transfers are made to CDP).

Will the bank provide me with regular statements of my bond investments?

You can get a snapshot of your holdings on your Wealth Dashboard via HSBC Online Banking.