If you’re new to investing, bonds may seem a little intimidating and difficult to understand. But really, they’re not that complicated! We put together this simple bonds explained guide for you.
Large organizations like governments sometimes need to borrow money (take on debt). One way for them to collect the money is to issue bonds.
You lend your money to the organization, and at an agreed-upon date in the future, they’ll pay you back with interest. Once you have loaned the money you will get a piece of paper that stipulates how much was lent, what the agreed-upon interest rate is, how often interest will be paid, and how long the term of the loan will be.
In a nutshell, bonds are basically IOUs.
They are less risky than stocks, and are a great way to diversify your investment portfolio.
Explanation of bonds: How many types of bonds are there?
There are six types of bonds you can buy, all defined by who's selling the debt.
- Government bonds
- Singapore savings bonds
- Perpectual bonds
- Bond funds
- Bond ETFs
Bonds explained: What do I need to look out for?
The most important 3 things to know when buying bonds is the par value, the coupon rate, and the maturity date.
- Par value is the amount of money you will receive once the bond matures.
- The coupon rate is the amount of interest you will receive, expressed as a percentage of the par value. So if a bond has a par value of $1,000 and a coupon rate of 10%, you will receive $100 a year as interest.
- The maturity date is the date when the bond issuer has to return the original amount to you. After the organization pays you back, they are no longer obligated to make interest payments.
How do I buy bonds in Singapore?
You can buy a bond at issuance, through a public offer.
You can also buy a bond from the secondary market (after issuance), as long as there is a seller for it. This can be done through the Singapore Exchange (SGX).