Investing in bonds, we need to have knowledge first. We can’t just look at the returns and rush to invest. There are more things we need to understand than that.
Who is who in the bonds?
Many people are confused and often think that the seller of the bond is the issuer of the bond, such as this bank sells bonds, the bank is our debtor, the person who takes care of us when something happens, or there is no risk because the bank supports us. That is a complete misunderstanding.
Everything will be clear if you understand the information in the prospectus.
In the prospectus for investment in bonds, we will encounter 3 groups of related persons as follows:
- An underwriter is a person appointed to sell bonds to investors (in practice, they are often the same person as the “financial advisor” for the bond issuance). Their main job is to do whatever it takes to get all the bonds bought .
- The Registrar of Bonds is responsible for maintaining the bondholders’ registry database from the date of issuance of bonds to the date of redemption. These registry tasks include notifying and creating a registry of beneficiaries, closing the registry for dividend benefits, transferring bondholders’ ownership, or changing their name and address, etc.
- Bondholder Representative” which the SEC has specified that all types of bonds offered to the general public must have a bondholder representative who will act as a representative of all bondholders in any action with the bond issuer. Duties include organizing bondholder meetings, taking action to claim damages from the bond issuer, and taking care of the collateral of the bonds in the case of secured bonds, etc.
How many types of bonds does he offer for sale?
- Bonds come in both simple and complex forms.
- There are both subordinate and non-subordinate rights.
- There are both insured and uninsured types, and the order of debt repayment will be different.
What is a subordinated bond? Is it risky?
In some prospectuses, we also find this term. So what is a subordinated bond?
Subordinated Bonds are bonds that pay interest and have a term similar to regular bonds, but differ in the priority claim when the issuer becomes bankrupt.
Holders of this type of bond will have a lower claim on debt than other general creditors in claiming assets from the bond issuer, but will have a higher claim than preferred and common stock holders who have the last claim.
Simply put, if the issuer of the bond goes bankrupt, the issuer cannot pay and must distribute the money to all creditors. If we are the holders of subordinated bonds, we will receive payment after other creditors with higher claims.
What is a “subordinated bond with equity-like characteristics” bond? Is it risky?
Subordinated debentures are not enough, there is also an additional word that says “having characteristics of capital”. In addition, there is a famous company that offers this long-named debentures to investors, and it is also interesting because it has attractive returns.
But don’t rush into investing. Let’s first understand what a perpetual subordinated bond is.
Which in principle is similar to the subordinated debentures described above, but the second part “has characteristics similar to capital”, that is, the right to redeem this debenture can only be done when the company ceases its operations or is held indefinitely. This characteristic is similar to holding shares indefinitely, so it is possible that investors will not receive the principal back while holding the debenture.
In addition, although this type of bond has a fixed interest rate like a general bond, there may be conditions such as not paying interest or sometimes it can be carried over to another period. And often set a floating interest rate, which means the interest rate will not be fixed forever.
Due to the complex and uncertain terms, companies that issue “subordinated bonds with equity-like characteristics” often set the interest rate of the bonds at a high rate to attract investors. As investors, we must look carefully.
It is necessary to consider the rating or credibility of the bond issuer before making an investment decision.
What are “secured” or “unsecured” bonds? What are the differences? And are they risky?
If we are going to buy a bond, the bond issuer is going to become our debtor. We have to look carefully at the bad luck. If he cannot pay or repay our debt, what should we use as collateral?
In the prospectus, if it says “secured”, it means that this debenture has collateral for us, such as a land mortgage, in which case we will become a “secured creditor”. If the company that issued the debenture has a problem and cannot pay the principal or interest to us, we will have the right to this collateral as well, which allows us to enforce payment of our debt before other creditors. This is considered to be somewhat risky, but there is still collateral.
On the other hand, a bond that is labeled as “unsecured” means that we are an “unsecured” creditor and we will have the right to receive payment in the same order and proportionately with other unsecured creditors. If the company issuing the bond has other secured creditors, in principle, we will have no right to that piece of collateral at all.
Except if there is a forced sale of that collateral and there is money left (i.e. the secured creditor who has rights over that collateral has received full payment from that collateral), then we will have the right to share in the money left from that collateral, which without collateral is very risky if the bond issuer goes bankrupt first.
Summary of debt repayment sequence if the bond issuer ceases operations or goes bankrupt
Secured bonds > Unsecured bonds > Subordinated bonds > Subordinated bonds with equity characteristics
Bonds are one of the investment methods that often provide higher returns than deposits.
If we are interested in investing in debentures, we must understand them in detail. Do not be fooled into thinking that these debentures come from a famous company or that these debentures have been approved by the SEC. This does not guarantee that these debentures will not have a chance of becoming bad debts.
What do you need to know if you want to buy and sell “bonds”?
Normally, when investing in debentures, we often have the opportunity to see news about debenture issuances coming out continuously in newspapers or various media channels related to finance and banking, or even ATMs, notices from various banks that we use, etc.
The next step is to contact the distributor to reserve. In this case, you can reserve and purchase at a commercial bank or securities company that is the distributor of that debenture. You can check which bank or securities company you are reserving from the prospectus or from the sale announcement that they have posted. You can contact the bank branch or the office of the financial institution that is the distributor.
Importantly, if the bond looks very interesting, we should hurry to contact to find information early before the subscription date because some great bonds may be sold out on the first day of subscription.
We must inform the officer of our intention to subscribe to how much. If there is a sufficient quota, which each bank branch or securities company that is the distributor may have a different quota, the bank or financial institution will subscribe to the amount that we subscribed in our name on that day, for example, requesting to subscribe to 200,000 baht (each bond has a different minimum subscription amount).
When the booking date arrives, we return to the bank branch or financial institution to fill out and sign the “Subscription Form” and bring cash or a check for 200,000 baht to pay for the bonds in the amount we booked. After that,
Then we have to wait for about 1-2 months, we will receive a bond certificate (in the case of requesting a bond certificate) or a document confirming from the Securities Depository Center that our bond has been deposited with the Securities Depository Center (Thailand) Co., Ltd.
What are the expenses and taxes involved in investing in bonds?
For our investment in bonds as a general public or individual, when investing in bonds, we will not have any other expenses to pay, whether at the time of purchase, during the bond term or when the bond matures. But there is something we need to understand well, which is the related taxes, which can occur in the following 2 cases:
- The tax on the interest we receive from bonds (Interest Income) is subject to income tax of 15% of the amount of interest received in each period, and the tax on the difference (Capital Gain) that we gain from selling bonds is subject to income tax of 15% of the amount of capital gain that we gain as well.
- Tax on Discount In the case of bonds offered for sale at a price lower than the face value, the difference between the redemption price at maturity of the bond and the bond selling price and the bond selling price (Discount) is considered income subject to tax, with 15% deducted from the first investor who purchased.
We can choose to pay all three taxes by choosing to withhold tax at source and not include it in the tax calculation at the end of the year, or choosing not to withhold tax at source but to include it in the tax calculation at the end of the year. It’s up to you whichever is more convenient. Just don’t forget to pay the tax.
I have invested in bonds. If I need the money, can I sell it before the bonds expire?
Normally, general investors in our country who buy corporate bonds tend to be very long-term investors, meaning they hold until the contract ends and rarely sell before the contract ends or sell for profit along the way.
Part of it may be because the price of our domestic bonds is not very exciting and there is not much liquidity, making it difficult to speculate on the difference.
If we can’t hold on anymore, can we sell along the way?
We can also sell these bonds in two main ways:
- What is the financial status of the company issuing the bonds? How is their management? The executives negotiate and buy/sell on a case-by-case basis with interested parties or deposit with banks related to that bond (such as registrars or distributors of the bonds) to help find buyers. If an agreement is reached to buy/sell, they simply sign the transfer on the back of the bond certificate. This method is collectively called Over-the-Counter (OTC).
- In addition, it should be considered whether the business or industry in which the debenture issuer is engaged is risky or not. Another way is to sell in the bond market (Bond Electronic Exchange or BEX), which is a secondary market, but must be a licensed securities company only. This method can be done only when we have to fill in the “Bond Subscription Form” from the beginning that we would like to deposit this debenture with the Securities Depository Center through our Broker so that it can be brought to the market for trading.
Therefore , before investing, we must study the conditions carefully, which can be read further in the prospectus or by visiting the SEC website > www.sec.or.th
Want to invest in bonds, but if you don’t really know, don’t invest yet.น
For other articles about bonds , you can read more at:
Bonds are not a loan for investment. So what exactly are bonds and who are they suitable for?
