[Bond Investment Guide] How to Buy Bonds in Hong Kong?
“Are bonds right for me? What is the difference between how bonds are invested and stocks? How to invest in bonds?” If you are planning to invest in bonds but have a similar question in your mind, this article will give you a quick understanding of the basics of bonds to help you get started in bond investing quickly.
What are bonds?
A bond is a debt instrument issued for the purpose of raising funds. The institution that issues bonds is usually a government or a corporation. In other words, investing in bonds is equivalent to lending money to a government or corporation that issues debt. After the investor purchases the bond, the issuer needs to follow the agreement to pay principal on the bill face at maturity, and to promise to pay regular interest to the bondholders prior to maturity.
The greatest characteristic of a bond is its “repayment of interest”, which is why it is also called a “fixed income asset”.
Advantages of Investing in Bonds
Stable earnings
Despite the high potential yield of stocks, the wrong selection or timing of the trade can result in losses, and no listed company underwrites the guarantee; and if the bond matures, the issuer is obliged to repay the money and pay a fixed interest.
More protection
If a company is liquidated due to operating problems, the creditors holding the bonds can take back part of their invested capital from the liquidated assets before the shareholders. In contrast, the interests are better protected. It should be noted that if the business is already indebted, the creditor's funds may not be fully secured either.
Bond and Equity Negative Related
Research data show (Source: The Discreet Charm of Fixed Income, PIMCO) that, although the correlation between 1933 and 2020, US stocks and bonds varied steadily, the correlation has been below zero for most of the time since 2000. This means that the overall yield of the bond market is likely to trend upward when overall stock market sentiment is subdued.
If stocks and bonds remain negatively correlated, investing in both categories at the same time is more conducive to stable returns on account assets.
Risks of Investing in Bonds
Investing in stocks becomes a shareholder of a listed company and needs to bear the risk that the company or market will fall due to adverse market factors. While bondholders will become creditors of governments or corporations, the greatest risk is the risk of default, that is, the risk that the issuer will not be able to repay principal and pay interest on time. Therefore, credit from a lending institution is very important, and investors should try to choose a lending institution with a relatively high level of credit.
6 Important Factors to Consider When Investing in Bonds
Debt Issuer: Country/Regional Governments, Companies, etc., that issue Bonds, or “Borrowers”
Bond face value (principal): Also called bill value, it refers to the amount of money paid by the bond issuer to the bondholder when the bond matures, simply “how much money borrowed”
MATURITY DATE: VALIDITY OF THE BOND BEFORE THE MATURITY DATE, BONDS WITHOUT MATURITY DATE ARE “SUSTAINABLE BONDS”
Ticket Rate: The interest rate agreed by the issuing institution to pay interest to bondholders (annualized rate)
Dividend Date/Frequency: The date or frequency at which the Debt Issuer agrees to pay (Annual/Semi-Annual/Quarter/Month)
Bond Price: The cost of buying a bond; note that bond prices are affected by factors such as interest rates and may not be equal to the face value, where premiums or discounts may occur
How to Calculate Bond Interest?
How to calculate how much interest can be earned per period of holding a bond? The calculation formula is as follows:
Periodic Dividend = Interest Rate ÷ Dividend Frequency x Bond Face Value
For example, let's say Akeong buys a bond issued by ABC, which has a bond face value of $10,000, is paid once every six months, with an interest rate of 5%, a term of 5 years, and the issue price is equal to the face value. Try 5 years later, how much interest will Aqong get when the bond matures?
The answer is: (5% ÷ 2) x 10000 x 10 = 2500
The bond is paid twice a year, 10 times in 5 years, and yields $250 per period (every six months). Therefore, during the holding period, Akeung can receive interest of $2500. After the bond matures, the issuer repays the principal, so Joakong holds the bond for a total of $12,500 after 5 years.
What are the types of bonds?
According to the maturity date of the bond, the issuer and the credit rating, it can be divided into the following categories:
By Expiration Date:
Divided into long-term debt or short-term debt. Generally, shorter-term bonds are less likely to be affected by interest rates, and the higher the certainty, so the interest rates are relatively low.
By Debtor:
Divided into government debt or corporate debt. In general, government debt is safer than corporate debt, especially in countries or regions with good economic conditions, such as U.S. Treasuries. SOME THIRD-PARTY RATING AGENCIES CONDUCT SOLVENCY ASSESSMENTS FOR DIFFERENT COUNTRY/REGIONAL GOVERNMENTS AND BUSINESSES, AND THE SAFER THE BONDS ISSUED BY THE HIGHER THE RATING AGENCIES ARE.
Rating by risk:
Divided into investment-grade or high-yield bonds (also known as junk bonds). According to the ratings standards of Moody's, S&P, Goodwill and others, BBB grade or above, and Baa grade or above, are known as “investment-grade bonds”, which are generally relatively safe, but also have lower interest rates; lower than these are known as “high-yield bonds” or “junk bonds”, with a higher risk of default, Also higher.
How do Hong Kong investors invest in bonds?
For Hong Kong investors, the bond options are not just as diverse as stocks, but they can also basically meet investment needs. Most investors in Hong Kong bonds prefer to choose bonds with a high risk rating, such as government bonds, US Treasury bonds, etc.
Common Government Bonds in Hong Kong
Commonly, government bonds are divided into listed and non-listed types, and the difference is that listed bonds are not only subscriptable, but can be traded on exchanges, similar to stocks; non-listed bonds can only be traded through a designated bank or broker.
The following are some of the most common government bonds in Hong Kong.
Inflation-linked bonds (iBonds)
iBond is an inflation-linked bond issued by the Hong Kong Government to all Hong Kong residents. As an example of iBonds issued in 2021, the minimum amount is HK$10,000, the annual period is 3 years, the dividend frequency is paid once every 6 months, with an annual interest rate of at least 2%, which can be traded with exchanges.
Silver Bonds
Silver Bonds are bonds issued by the Government of Hong Kong specifically for the elderly. They were first issued in 2016 to provide the elderly Hong Kong public with a safe, low risk and stable return investment option. As an example of a bank bond issued in 2023, the minimum amount is HK$10,000 for a period of 3 years, with a frequency of payment of every 6 months, and the age of 60 or above must be subscribed for. Silver bonds are not supported on exchanges, but can be redeemed by the government at any time.
On 11 September 2024, the Hong Kong Government announced that it will launch a new batch of bank debt and commence subscription with the imminent commencement of subscriptions. For details, please refer toGovernment Announcement.
The distribution and distribution information in the past years is as follows:
Government Sustainable Bonds (Green Bonds)
Sustainable government bonds (also known as green bonds), issued by the Hong Kong Government for the primary purpose of raising funds to fund qualifying green projects. The bonds will be offered for the first time in 2022, with a minimum denomination of HK$10,000 for a period of 3 years with a dividend frequency of every 6 months at a minimum annual rate of 4.75% at an annual rate of at least 4.75%, which can be traded on exchanges for the first time in 2022. All private investors holding a valid Hong Kong Identity Card are eligible to subscribe.
Agency Retail Bonds
Agency Retail BondsFunding schemes issued by the Hong Kong Airports Authority are used to fund airport development schemes, infrastructure improvements or other operations-related costs. (The Hong Kong Airports Authority is a statutory body within the Hong Kong Government, responsible for the operation and management of Hong Kong International Airport)
For example, the HK$10,000 minimum denomination, issued in 2024, is 2.5 years with a dividend frequency of every 3 months and an annual interest rate of 4.25%. All investors holding a Hong Kong Identity Card can apply on exchanges.
U.S. Treasury Bond
As the name implies,U.S. TreasuryThese are bonds issued by the US government that can be traded by both institutional and individual investors worldwide. Often rated by institutions with the highest credit rating, U.S. Treasury bonds are among the best liquidity bonds in the world and are also considered one of the “safest assets.”
U.S. Treasury debt is divided into three categories: short term (within 1 year), medium (within 10 years), and long term (10 years or more), and different U.S. debt rates for different years and maturity dates.
Click here to learn more about getting started with US Treasury.
How to buy US Treasury bonds?
In the Futubull app, you can find US bonds in a simple step.Investing in US debt through Futu, Entry threshold starts at $1000.
Click on “Finance” and select “Bonds”
Go to the “Bonds” page to view bonds by category on the home page
Click on US Bonds - To see the list of bonds that support the Futures trade, click on the filter selector in the upper left corner, and then click on the Conditional Bond Option
Click on specific bonds to see the latest quotes and historical trends
Don't want to buy bonds directly? It is also possible to invest in bond ETFs
In addition to buying bonds directly, investors can also invest in bonds through ETFs.
In relative terms,Bond ETFTHE BIGGEST ADVANTAGE IS THAT INVESTORS CAN AVOID THE HASSLE OF CHOOSING SPECIFIC BONDS AND DIRECTLY HOLD A BASKET OF BONDS AT LOW COST TO ACHIEVE THE PURPOSE OF DIVERSIFYING INVESTMENTS.
However, bonds and ETFs are essentially two completely different trading categories: bonds have maturities, but ETFs have no maturities. Institutions that manage ETFs regularly replace old bonds held in positions with newly issued ones.
Learn more:【What is ETF】Hong Kong Investors Must See ETF Investment Guide
Should I choose to buy bonds directly or bond ETFs? You can judge based on your investment goals.
Let's say you invest in bonds for long-term investment for a steady return on a regular basis, then direct investment in bonds is better suited to your needs; assuming you invest in bonds for a medium-short term asset allocation, or perhaps trade multiple times in a year, bond ETFs are relatively easier to invest in.
