- Simply put, a bond is a loan from an investor to a borrower. A borrower can be a company or even the government.
- Wholesale bonds in Singapore trade in minimum denominations of S$250,000 and make up most of the total SGD denominated corporate bonds in Singapore
- In Singapore, investing in wholesale corporate bonds has traditionally been limited to institutional investors and the extremely wealthy. ADDX allows users to buy fractional shares of these bonds for much smaller amounts.
What are bonds?
Simply put, a bond is a loan from an investor to a borrower. A borrower can be a company or the government itself. The borrower can use the investment as capital to fund its operations and the investor receives an interest for the investment. Bonds have a maturity date where the principal is repaid, based on a predefined payment frequency (Times the principal is paid per year). Bonds are one of the three main asset classes along with stocks and cash itself.
Wholesale and Retail Bonds:
In Singapore, bonds can be traded in 2 ways: wholesale and retail. Wholesale bonds trade in minimum denominations of S$250,000 make up the majority of the total SGD denominated corporate bonds in Singapore. Retail bonds, on the other hand, trade in lot sizes of S$1,000. Wholesale bonds are traded Over-The-Counter (OTC), while retail bonds are traded on the stock exchange.
Types of Bonds:
Marketable debt securities issued by the government are called treasury bonds. All debt issued by the government of a stable country is regarded as extremely safe as countries rarely go bankrupt.
Zero Coupon Bonds
Zero bonds are issued at a considerable discount to par value and lengthy maturity periods (For example, bonds issued at $800 for a bond worth $1500 in 10 years). Since they do not payout interests, they are called zero bonds.
In terms of risk, municipal bonds are safest, after treasury bonds. Cities rarely go bankrupt too, but it could be more often than countries. Municipal bonds can be an effective holding for investors who wish to increase their yield over government bonds, in exchange for a slight increase in risk.
Corporate bonds are issued by companies. They are riskier than government-backed bonds as the risk of default by a company is higher than a government, so they offer a higher rate of return. Higher the credit worthiness of the company, lower the interest rate the investor receives.
Bonds issued by companies with a very high chance of default are called junk bonds. They offer very high interest rates to compensate for the risk.
Although they are technically stocks, they act like bonds. Preferred stockholders receive fixed interest at regular intervals. In case of bankruptcy, they get paid before common stockholders, but after bond holders.
Certificates of Deposit
Certificates of deposit are like bonds issued by a bank. You essentially loan the bank your money for a certain period, for a guaranteed fixed rate of return.
You can read about the advantages and disadvantages of wholesale bonds here.
Who can invest in wholesale corporate bonds?
In Singapore, investing in wholesale corporate bonds has traditionally been limited to institutional investors and the extremely wealthy. ADDX democratises wholesale bond investing by fractionalizing them and making them available to accredited investors for as little as S$10,000 for primary offerings and as little as S$100 to trade.
To qualify as an ADDX investor, investors need to meet one or more of the following conditions:
- Yearly income of at least S$300,000 or
- Net financial assets of at least S$1,000,000 or
- Net total assets of at least S$2,000,000
The bottom line
Wholesale bonds can be a valuable addition to a diversified portfolio. They offer a steady and predictable income stream and, given that they have lower credit ratings than government bonds, generally offer higher yields too. However, before investing, investors need to assess the potential risks they may be exposed to.
ADDX is your entry to private market investing. It is a proprietary platform that lets you invest from USD 10,000 in unicorns, pre-IPO companies, hedge funds, and other opportunities that traditionally require millions or more to enter. ADDX is regulated by the Monetary Authority of Singapore (MAS) and is open to all non-US accredited and institutional investors.