Bonds are a type of financial instrument that represent a debt obligation between bond issuer and holder (or investor). The bond indicates the maturity date and coupon rate or other specific benefit, including coupon and principal payment date from the issue date. Before the maturity date, bonds can be bought and transferred.
The bond issuer is the money borrower or debtor, while the buyer is the lender or creditor. Bonds are different from equity instruments or common stock. Buyers of equity instruments invest as a shareholder (not a creditor) and equity instruments serve as applicable evidence of an ownership right in a company.
Bonds for raising capital under the Basel III regulatory accord or so-called unsecured subordinated debt, attracts more interest from investors. The transition from Basel II to Basel III resulted in higher capital accumulations among financial institutions. Basel is an international regulatory accord that supervises the stability of financial institutions. It requires banks to maintain adequate capital in case of a credit crisis. Basel III regulatory accord aims to achieve more comprehensive and effective supervision over financial institutions.
In general, the bonds’ life is not less than five years. The final payment date (by the issuer) shall be 5 years after issuance.
Issuers of bond: Banks, companies, Ministry of Finance, state enterprises
Types of bonds: 2 types
1. Subordinated bond: If a company (issuer) falls into liquidation or bankruptcy, the unsecured creditors are entitled to debt payments after priority creditors and ordinary unsecured creditors. The right of unsecured creditors to demand debt payment from the issuer is subordinate to the right of ordinary creditors, but higher than the right of holders of preferred stock or common stock, respectively.
2. Senior bond: The right of senior bond holders to demand debt payment from the issuer is equal to the right of other ordinary creditors, but higher than the right of holders of subordinated bond, preferred stock or common stock, respectively.
Tenor: Starting from the issue date to maturity date
Issue date: The issue date of bond and the first date of coupon calculation
Maturity date: The maturity date or expire date is when the issuer pays the principal and the last coupon amount to the creditor.
Par value: Par value is the face value of a bond which can be divided into units to trade in the over-the-counter market. Par value for a bond typically starts at 1,000 Baht / unit and remains the same until the maturity date.
Coupon rate: The yield which is determined since the issue date. It can be either fixed rate or floating rate. However, the bond funds only have a fixed rate.
Payment frequency: The frequency of yield payments, for example 3 times per year means payment every 4 months, and 4 times per year means payment every 3 months.
Bond rating: The credit rating ranked by the rating agency to reflect debt payment capacity for such bond. The bond with high rating means the risk of bad debt is lower, in comparison with bonds with lower rating. Therefore, the bond with low rating offers high yields to compensate the higher risk of delayed debt payment.
Unsecured bond: A bond with no security for debt payment. The holder of an unsecured bond could be an ordinary creditor of the issuing bank. It can be a subordinated bond whose holders have subordinate rights to the rights of ordinary creditors.
Callable bond: A callable bond is a bond that can be redeemed by the issuer prior to its maturity. The terms of redeeming prior to the maturity date are indicated in the bond offer summary documents.