This is to inform that by clicking on the hyperlink, you will be leaving sc.com/ke and entering a website operated by other parties. Show Such links are only provided on our website for the convenience of the Client and Standard Chartered Bank does not control or endorse such websites, and is not responsible for their contents. The use of such website is also subject to the terms of use and other terms and guidelines, if any, contained within each such website. In the event that any of the terms contained herein conflict with the terms of use or other terms and guidelines contained within any such website, then the terms of use and other terms and guidelines for such website shall prevail. Thank you for visiting www.sc.com/ke Proceed Managing your wealth well is like tending a beautiful formal garden – you need to start with good soil and a good set of tools. Just as good soil has the proper fertility to nourish a plant, having the right foundation in financial literacy should empower you to potentially cultivate a successful investment portfolio. Cultivate an Understanding of Bonds is part of our financial education series to help educate you on the fundamentals of investing as you tend your very own financial garden. What is a Bond?If you are looking to build up a well-diversified portfolio, you will usually be advised to include both stocks and bonds among your investments. While stocks may offer you the potential for capital appreciation, bonds may provide a steady stream of investment income, and play an important role of potentially lowering your overall portfolio risks. A bond is a debt security where the bond issuer (the borrower) issues the bond for purchase by the bondholder (the lender). It is also known as a fixed income security, as a bond usually gives the investor a regular or fixed return. When you invest in a bond, you are essentially lending a sum of money to the bond issuer. In return, you are usually entitled to receive interest payments (coupon) at scheduled intervals; and capital repayment of your initial principal amount at an agreed date in the future (maturity date). Typical bond issuers include:
How do Bonds Work? Example of bond issuers and their funding needs Corporations
Government Treasury
States, Cities, Townships
What Types of Bonds are there?Bonds are differentiated by their varying payment features Fixed-rate bond The interest or coupon rate of the bond is fixed for the entire term (tenor) of the bond. If the bond comes with an embedded issuer call option, the bond issuer may prepay the bond at certain pre-determined dates. Floating-rate bond Unlike Fixed-rate bonds, the coupon or interest rate of a Floating-rate bond is variable. The interest rate is reset at each coupon payment date, in accordance with a predetermined interest rate index. As in the case for Fixed-rate bonds, issuer call options may also be embedded. Subordinated bond This type of bond has a lower repayment priority than other bonds issued by the same issuer in the event of the liquidation or bankruptcy of the issuer. A subordinated bond has a lower credit rating because it carries higher risks but pays higher returns than other non-subordinated bonds of the same issuer. These bonds are usually issued by banks. Convertible bond These bonds allow the bondholder and/or issuer to convert them into shares of common stocks/shares in the issuing corporation at a pre-determined price in the future when certain conversion criteria are fulfilled. Such bonds are usually issued by companies and tend to pay lower coupon rates than ordinary bonds of the issuer due to the attractiveness of the conversion feature. TIPS (Treasury Inflation Protected Securities) These bonds peg their principal amount to the inflation index, therefore protecting the bondholder against inflation. Such bonds are issued by governments. Zero-coupon bond Also known as a discount or deep discount bond, this bond is bought at a price lower than its face value, with the face value repaid at the time of maturity. It does not make periodic interest or coupon payments, hence the term zero-coupon bond. Why Invest in Bonds?
What are the Risks?Credit or Default risk This is the risk that the bond issuer or borrower is unable to meet the coupon or principal payments on any outstanding bonds or debt (not just the bonds you may be holding) when they fall due (for example, due to bankruptcy or insolvency), and go into default. Interest rate risk Interest rates and bond prices are inversely related. Should interest rates rise, the price of your bond will tend to fall (and vice versa). The longer the time to maturity of a bond, the greater the interest rate risk. Foreign Exchange risk Some bonds are denominated (and the issuer’s payments made) in a foreign currency, which may fluctuate against your home currency. The impact of such foreign exchange movements may offset any interest or capital returns you may receive from the bond investment. Liquidity risk This is the risk of having to sell a bond at discounted prices due to the lack of a ready market or buyer. When a bond has a low credit rating (for example, due to the fact that it is part of a small issue or that the issuer’s financial situation is questionable), the liquidity risk will tend to be higher. Event risk Events such as leveraged buyouts, mergers, or regulatory changes may adversely affect both (i) the bond issuer’s ability to make payments on the bond, and (ii) the price of the bond. Sovereign risk Payment of the bond may be affected by the political and economic events in the country of the issuer of the bond. For example, the issuer may be forced to make payments in the local currency of the issuer’s country instead of the original currency of the bond. Click here to read our “Advanced Guide to Investing in Bonds“ How can we help you further?Do you have a question on what you have just read? Would you like to have a further discussion on this subject? Contact your Relationship Manager, or any of our Standard Chartered Bank locations closest to you for more information. Which bond can be redeemed before maturity?Callable or redeemable bonds are bonds that can be redeemed or paid off by the issuer prior to the bonds' maturity date.
Why callable bonds are issued?Why Companies Issue Callable Bonds. Companies issue callable bonds to allow them to take advantage of a possible drop in interest rates in the future. The issuing company can redeem callable bonds before the maturity date according to a schedule in the bond's terms.
Why would a company redeem callable bonds?Bond issuers redeem callable bonds when interest rates experience a big drop. When rates fall, issuers of callable bonds have two choices: They can keep the bonds active and pay higher-than-market interest rates to investors, or they can redeem the bonds and cease making those interest payments.
What is callable and putable bonds?In contrast to callable bonds (and not as common), putable bonds provide more control of the outcome for the bondholder. Owners of putable bonds have essentially purchased a put option built into the bond.
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What kind of type of bond that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity?
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