Frequently Asked Questions

Bonds are debt securities issued by corporate or government entities (the bond issuer). Entities usually issue bonds in order to raise money to finance various projects and activities.

When you purchase bonds, you are essentially lending money to the bond issuer in return for interest. This interest, also known as the coupon, is a fixed percentage rate which will be paid out to the bond holder at regular intervals, up until the maturity date of the bond. When the bond matures, the bond holder gets back the full principal amount, also known as the face value, par value, or capital.

Bonds offered on CapBridge are typically wholesale bonds issued by reputable companies, but are denominated in $1,000 instead of the usual S$250K or US$200K.

You can typically classify bonds into 3 types: government/sovereign bonds, institutional-grade corporate bonds, or junk bonds.

1. Government / Sovereign Bonds
   As the name implies, government/sovereign bonds are issued by government and sovereign bodies. For example, Singapore Government Securities or the U.S. Treasury. Backed by the full reputation of the government, such bonds are widely traded and are typically regarded as risk-free. As such, they usually have the highest credit ratings and the lowest yields among bonds, making them a good defensive asset for investors with the lowest risk tolerances.
   
   
2. Junk Bonds
   At the other end of the risk spectrum are junk bonds. These are bonds issued by companies which are rated as less creditworthy, or otherwise not rated at all. In other words, these companies have a higher risk of default. Consequently, these bonds will usually offer higher yields to compensate investors for their risk.
   
   
3. Institutional-Grade Corporate Bonds
   Institutional-grade corporate bonds sit nicely in the middle of the spectrum, offering great risk-adjusted returns. Institutional-grade (IG) bonds are rated by established rating firms (such at Moody’s, S&P & Fitch) for their creditworthiness, and only the top issuers get the IG grade. They offer a good balance between yield and risk, and are a great addition to any investment portfolios.

There are a few key components to a bond.

Principal Amount
This is the amount which will be returned at bond maturity. Note that it may not be the same amount that the investors has paid for the bond. As the bond is traded on the secondary market, its price may fluctuate, but the principal amount is what will be returned at maturity. The principal amount is also known as the face value or par value.

Coupon Rate
Also known as interest, it is the annual rate that the bond issuer must pay the bond holder based on the principal amount. For example. if the coupon rate is 5% and the principal amount is $10,000, that means that the bond holder will receive $500 per annum for the duration of the bond. Payment schedule is generally indicated when the bond is sold, usually on an annual, semi-annual, or quarterly basis.

Maturity Date
This is the date when the bond matures and the bond issuer must repay the principal amount to all bond holders in full.

Wholesale bonds, make up the majority of the bonds available in the market. They are typically bought and sold Over-The-Counter (OTC) – the transaction happens directly between the buyer and seller, with a broker acting as the intermediary to establish the bid and ask quotes. Wholesale bonds usually require a minimum investment amount of S$250K or US$200K, depending on the bond denomination. Most reputable companies offer wholesale bonds as a means to borrow money.

On the other hand, retail bonds are bonds that are traded on a public stock exchange. While they are offered in smaller ticket sizes, they pale in comparison to the quality and variety of bonds available in the market. For example, as of July 2021, there are only 11 SGD-denominated retail bonds available to investors, compared to more than 300 wholesale bonds present on OTC.

Bond ranking, or seniority, determines the order of repayment in the event of a default. In general, bond ranking order are as follows:

Secured debt
Sitting at the top of the ranks are secured debt, which are bonds that are backed by collateral or company assets. In the event of a default, these assets will be sold and the money recovered will be used to pay off the holders of the bond.

Senior / Unsubordinated Bonds
Next in line are senior bonds, which get the top priority in repayment during a default event.

Junior / Subordinated Bonds
Ranked at bottom are junior bonds, which is why that are ‘subordinated’. Should a default occur, junior bonds are paid out last, using whatever remaining assets left after the senior debt has been repaid.

Equity
Investors should also note that equity is considered subordinated to all forms of debt. In other words, equity is ranked lowest amongst any claim on a company’s assets. In a default event, equity holders get paid last, and in most cases, recover very little of their investments.

Primary Market
Newly issued bonds are sold in the primary markets, typically through an auction.

Secondary Market
Once the bond has been sold in the primary market, they can be traded in the secondary market. This typically happens over-the-counter through a broker.

On CapBridge, investors can buy and sell bonds directly using our digital interface, for a convenient and hassle-free experience.