Sort bond issuers by type and say how risk and return change from one type to another.
In one week, Hui Min's bank app shows her three things. There is a reminder that the next Singapore Savings Bond application window is open, an advert for a retail bond from a property developer that pays a noticeably higher rate, and a news story about a statutory board raising money from investors.
All three are bonds, and every bond is a loan. What separates them is who is borrowing, and that matters more than almost anything else on the term sheet. Singapore has three main groups of bond issuers: the Government; statutory boards and government-linked companies; and banks and other companies. Each group pays a different rate because each carries a different chance of not paying you back.
The Singapore Government is the safest borrower a Singapore investor can lend to in Singapore dollars. Its debt is a family called Singapore Government Securities (SGS). MAS issues SGS for the Government, runs the auctions and publishes the details on its website.
Three members of the family come up in this course:
SGS bonds last for years and pay a coupon every six months. T-bills last a year or less and pay no coupon. You buy them below face value instead. Singapore Savings Bonds (SSBs) are designed for individuals. They have step-up interest, and you can get your money back in any month.
All three have the same borrower, so they carry the same credit risk, which is the risk that the borrower does not pay. For SGS, that is the risk that the Singapore Government does not pay. The three differ in how long you lend for, how you buy them and how easily you can get out. Module 3 covers SSBs, and Module 4 covers T-bills and SGS bonds.
Statutory boards, such as the bodies that run housing or land transport, sometimes issue their own bonds. So do companies partly owned by the state, often called government-linked companies. Neither is the same as SGS. Each is a separate borrower with its own finances and its own legal promise to pay.
A link to the Government can make investors more comfortable with these borrowers, and that often means they pay a lower interest rate than a purely private company would. Unless the Government has explicitly guaranteed the bond, though, only the issuer promises to repay. When you read about one of these bonds, check whose name is on the bond, and ignore whose name is in the news.
The third group is everyone else: banks, property developers, REIT managers, transport and telecoms firms, and smaller companies. They borrow to pay for buildings, ships, acquisitions or day-to-day operations.
Companies pay more than the Government because they are more likely not to pay you back. A company can lose customers, take on too much debt or be hit by a downturn in its industry. The Government has powers no company has, including raising taxes. The extra yield a company pays above a similar government bond is the market's price for that extra risk, and it is called the credit spread. You measure it yourself in Module 6.
Risk also varies widely within the company group. A large bank with decades of steady earnings is a very different borrower from a young company with one project. When a company bond pays a higher coupon, read it as a warning that the market sees the promise to repay as less certain. It is not a bonus.
Many corporate bonds in Singapore are not open to ordinary investors at all. Many are sold only to accredited or institutional investors, categories that MAS rules set out for people with higher income or wealth and for professional funds. Others are open to anyone in principle but are sold in lots too large for most people, which puts them out of reach if you are investing a few thousand dollars.
What you can buy directly is SGS bonds, T-bills and SSBs, all available in small amounts, plus some company retail bonds and perpetual securities. The company products are sold with a prospectus or product highlights sheet and are often listed on SGX. If you want exposure to many company bonds at once, the usual route is a bond fund or bond ETF. Module 7 compares those with holding bonds directly.
A rough ladder puts borrowers in order of credit risk, lowest first. At the bottom is the Singapore Government, through SGS bonds, T-bills and SSBs. Next come statutory boards and other borrowers close to the state. Above them are large, well-established banks and companies. At the top are smaller or more indebted companies, along with products that rank below ordinary bonds if the issuer fails, such as perpetual securities.
Hui Min sorts her three bonds by who is borrowing. The Singapore Savings Bond goes at the bottom, because the borrower is the Government. The statutory board's bond comes next. The property developer's retail bond sits above both, which explains the noticeably higher rate it pays. Once she puts the borrower first, the order is obvious.
Treat a borrower's place on the ladder as a starting point. A particular large company can be shakier than its size suggests, and Module 6 shows you how to check a specific issuer. The order of work is the same each time. Identify who is borrowing before you look at the rate. Check whose name is on the bond and whether the Government has explicitly guaranteed it. Place the borrower on the ladder, read a higher coupon as a sign of higher risk, and then check the specific issuer. Asking who is borrowing before looking at the rate is the single most protective habit a bond investor can have.
You are going to sort a list of your own next, and give each borrower a reason for its place.
Name three borrowers whose bonds a Singapore retail investor can buy. Rank them from lowest to highest credit risk and give one reason for each.
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