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  • Bonds Explained : What are they, and how can they fit into your investment portfolio

    Bonds Explained : What are they, and how can they fit into your investment portfolio

    Disclaimer: This article was curated as part of a sponsorship agreement with Bondsupermart in conjunction with MYFS. 

    If this were an exam, the answer would be “A fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or government) (Fernando, 2021).

    To illustrate it with an example:

    Let’s say company A wants to raise funds. They could issue bonds, and if investors deem it attractive, they will hold the bond.

    What do investors get when they hold a bond? Well, year to year, they may receive “coupon payments” for holding the bond, and at the end of the maturity period, they receive the payment in full.

    Face Value: RM1000
    Coupon Rate: 5%
    Coupon Payment Frequency: Yearly
    Time to maturity: 3 years

    You initially lend RM1000 to the company, and every year for 3 years, you get 5% (which is RM50). At the end of the 3 years, you not only will get the RM1000 back but you’ve also received another RM150. 

    There are more complex things to consider, such as the “present value of a coupon” and the risks involved. There is always a chance that the company (or country, in the case of Greece) will be unable to repay you.

    Some key terms involved with bonds:

    Principal: How much the issuer will pay the lender of the bond at expiration, also called a fixed value.

    Covenant: legally binding, agreed on by lenders to protect themselves if the bond issuer fails to meet the obligations.

    For other commonly used terms and jargons, you may read this article or visit Bondsupermart’s dedicated bond basics page for more information.

    The history of bonds

    While the modern-day bond seen in financial markets today did not emerge until the 1700s, the first “debt” and contract of sorts can be traced back to present-day Iraq in 2400 BC (which would be 4422 years ago) (Cummans, 2014).


    (Image Source : Bondfunds.com)

    The above is a picture of the stone. The terms in question were guaranteed payment of grain, and the surety guaranteed the principal if payment failed.  

    Bonds can be issued not only by corporations but also by governments. The Bank Of England created the first government bonds in 1693 to raise funds for a war against France (Cummans, 2014). In The First Avenger (2011), you may remember Captain America mobilising the public and driving demand for government bonds by putting on various entertainment shows.


    (Copyright of Marvel Studios) 

    Have you wondered what the world would be like without bonds? Hear this podcast as Senior Fixed Income Analyst Dexter Tan from iFAST Singapore discusses the origins of bonds, if there is a need for this asset class, and dive deep into the questions you may have about why bonds exist.

    How do you calculate bond prices and trade them?

    It is far easier to determine a bond’s present value than stocks. If we return to our previous example

    Face Value: RM1000
    Coupon Rate: 5%
    Coupon Payment Frequency: Yearly
    Time to maturity: 3 years

    1000 / (1 + 0.05) ^ 3 = Present Value

    If I were to purchase the bond right now at par, with three years to maturity, its present value would be $863.84

    Bonds, like stocks, can be traded on the open market, but you may pay a higher price due to a premium.

    Like stocks, bonds can trade for below or above their “fair value.” For one, bonds may fall in price or desirability due to interest rates/Overnight Policy Rate (OPR) rises. However, bond issuers make the promise to pay investors the face value at the bond’s maturity date. While there are companies that fail to do so, the likelihood of default in payment is typically low for financially stable corporations and agencies.

    Bonds can also fall in price if there is an increased perceived risk among the public associated with the bonds. For instance, take Serba Dinamik, an energy services group in the Oil & Gas, petrochemical, power generation industries, water & wastewater, and utility industry. 

    Serba Dinamik is currently being sued by the Securities Commission for “submitting false statements,” and its stock is currently suspended after failing to meet its Sukuk payment of $222 Million to the holders (Reuters, 2021). As a result, market participants are concerned that they will default on further bond payments, hence a fall in the bond price.


    (Source : Bondsupermart, SDHMK 6.300% 09May2022 Corp (USD)

    Calculations are made easier with Bondsupermart’s Bond Calculator, due to it taking into account figures like accrued interest. If you purchase the bond at a price of 13.401 USD with a settlement date of 12 Jan 2022, the total payment would amount to USD29,007.

    Assuming things go smoothly and the company fulfills its financial obligations, you can receive an annual coupon of USD 12,600 on top of USD 200,000 when the bond expires, which would be a nearly 690% return on your investment. However, after failing to meet it’s previous sukuk payment, investors may feel less confident that their financial obligations would be fulfilled. 

    Where do bonds fit into a portfolio?

    Bonds offer investors a fixed rate of interest so investors can better estimate their returns before investing in a bond. This is in contrast to stocks, which typically do not offer such predictability. The principal amount and annual coupons should theoretically be paid regardless of how the value of the bond fluctuates. It is important to note that a company could possibly default or file for bankruptcy resulting in a loss of investment sum for investors in reality. Despite this, investors can limit their risk by researching a company’s bond rating to gauge if the company can repay its debt. Such ratings are clearly indicated in Bondsupermart’s bond factsheet.

    Or consider this scenario: suppose you are well versed with the company but rather not hold a stake in its growth. But, you feel confident they can meet the repayment and think that the bond is trading at a fair value. In that case, individual investors can choose to add these fixed income instruments to their portfolios.

    If you would like to explore bonds further, check out Bondsupermart’s website (https://www.bondsupermart.com/bsm/home), where you can explore the bond market or read up on insights in the bond world.

    For bond-related news within your fingertips, follow Bondsupermart on their socials – Telegram, Facebook, and Twitter!

    References: 

    Reuters. 2021. Malaysian securities regulator charges Serba Dinamik, seeks arrest of CEO. [online] Available at: <https://www.reuters.com/business/aerospace-defense/malaysian-securities-regulator-charges-serba-dinamik-seeks-arrest-ceo-2021-12-29/> [Accessed 4 January 2022].

    Fernando, J., 2021. What Is a Bond?. [online] Investopedia. Available at: <https://www.investopedia.com/terms/b/bond.asp> [Accessed 4 January 2022].

    Cummans, J., 2014. BondFunds.com. [online] BondFunds.com. Available at: <http://bondfunds.com/education/a-brief-history-of-bond-investing/> [Accessed 4 January 2022].

    Serba Dinamik SDHMK 6.300% 09May2022 Corp (USD) factsheet : https://www.bondsupermart.com/bsm/bond-factsheet/XS1900582476

    Researcher: Muhammad Bahari

    Editor: Natalie Eng

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  • Too Young to be Insured?

    Too Young to be Insured?

    A survey conducted by Aon, a British insurance company, has indicated that medical costs in Malaysia have been rising consistently since 2016. The inflation rate within the medical sector in 2018 was 13.2%, which is a 0.6% increase from a year before. Malaysians have spent RM19,570 million of their salary/ savings on medical bills, triple the figure since 1997. 

    Despite the facts stated above, most millennials are not equipped with medical insurance. Feeling youthful and at their prime, this may not pose as a necessity. Besides that, many feel intimidated by the mere idea of obtaining an insurance scheme due to the overwhelming variety of plans available, coupled with a lack of understanding of how insurance premiums work.

    Understanding how insurance premium is determined

    When applying for an insurance plan, various information such as one’s current medical condition and familial disease will need to be provided. An actuary will then estimate the chances of the individual making a claim on their policy. With the information that the insurance provider has in hand, the probability of his/her mortality at a certain age can then be determined. The higher the frequency of insurance claims, the higher the insurance premium that needs to be paid. 

    Although it is tempting to hide any pre-existing medical condition in fear of high insurance premium or application rejections, it is a very risky action as the insurance provider has all the rights to deny your claim if you omit any important details about yourself.

    The younger, the better?

    The general population of adults at the age of 20-35 have relatively robust health, for example, is capable of recovering from a night out’s drinking festivities with relative ease. In short, they are most likely to have minor or near to zero medical condition. Therefore, the insurance premium charged will also be lower as the premium payable is assessed according to one’s current medical condition. For comparison purposes, insurance premium paid by a 50-year-old single individual will be significantly higher by 80% as compared to a 25-year-old single individual. 

    When a person has finally decided to sign up for a health insurance plan, there will be a waiting period of 30 days to 120 days before they can start making his/ her claims. The waiting period is set between the health insurance provider and the policyholder, for which no coverage will be available and no claims can be made for that fixed amount of time. This acts as a protection for the insurance provider, by preventing the policyholder from making claims against a pre-existing medical condition or making claims immediately after obtaining a plan. 

    Knowing that all medical insurance policies come with a waiting period, you would want to have a health insurance plan while you are young and healthy as unexpected incidents may happen in the future. It will be a bummer if you are prevented from making any claims due to the waiting period that was agreed upon in the insurance agreement. 

    This or That? 

    Now that you have a basic understanding of how health insurance works, let us go deeper in-depth to make sure that you are well-versed enough to differentiate the plans offered by one insurance provider from the other. 

    All insurance providers offer different benefits, depending on their chosen selling point(s) and the customers that they are targeting. Some of the benefits that act as a major differentiator between the various plans available in the market are the annual and lifetime limit, inpatient and outpatient treatments, besides hospital room of choice and the limitations on the intensive care unit.

    Benefits Explanation
    Annual Limit Fixed claimable amount each year 
    Lifetime Limit Total claimable amount within the policy period 
    Inpatient Treatments The cost incurred when one is admitted to the hospital.

    Eg: surgery, hospital supplies and services, anaesthesia and specialist consultation
    Outpatient Treatments The cost incurred when treatment is done without staying in the hospital.

    Eg: kidney dialysis, diagnostic test and cancer treatment
    Hospital Room Benefit limit for a hospital stay

    Eg: claimable amount limited to only RM 100 per night
    Intensive Care Unit  Benefit limit for confinement in an intensive care unit

    Although insurance premiums require financial commitments, it is important to realize that you may still end up having to fork out money to pay for your own medical treatment, especially if you signed up for the cost-sharing insurance payment scheme. The amount payable by policyholders in such a scheme is conditional on the pre-set fixed claimable amount, the percentage claimable agreed upon, or the medical condition that you are being treated for. For example, if one’s pre-set fixed claimable amount is RM1,000 but the medical treatment amounted to RM3,000, the policyholder will be liable for the remaining payment of RM2,000. In essence, a fully-insured plan insures one against the full amount of his/her medical fees (subjecting to benefit limits) whereas in cost-sharing plans one will be bound to pay a fixed or variable amount before the benefits come into effect.

    To determine which plan will suit you better, you need to backtrack your past medical expenses. If you rarely visit the doctor, it will be savvier for you to obtain the cost-sharing plan instead of the fully-insured plan, as premium for the latter will be comparatively higher. 

    How well do you want to be serviced?

    Hopefully, at this point, you already have a better idea of the kind of insurance policy that commensurate your current/ past medical condition and financial capabilities. The final factor to consider is whether you should obtain the plan directly from an insurer or an agent. 

    The difference between these two options is the level of service that you expect to receive during the tedious claiming process. Obtaining a plan directly from an insurance provider will definitely cost less as you do not have to account for the commission cost of an agent. However, you will need to handle possible issues related to claims by yourself, instead of delegating the work to an agent.

    Medical insurance is one of those things that would often be deemed negligible. The thought of buying an insurance plan could be as daunting as it is important. Millennials should not “escape” from it but instead, take a proactive stance to find out more about it and consider its usefulness towards their lives.

    Grab a good deal while you still can, young man!

    Writer: Lim Yue Jia

    Reviewer: Vikky Beh

    Editor: Iman Tan

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