Overview of what is a bond and why t

Overview of what is a bond and why they are seen

　　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 ofSingapore， 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 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 pai 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 issuerin 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 governmen