You will be able to redeem an SSB and explain why early redemption carries no capital loss.
Eighteen months after buying her SSB, Farah's laptop dies in the middle of a freelance project. She needs about S$2,000 by next month. Her first worry is that taking money out of a ten-year bond will cost her a penalty, or that she will have to sell it for less than she paid. Neither is true, and this lesson explains why the SSB is built that way, and what leaving early really does cost.
You can ask to redeem all or part of an SSB holding in any month. You make the request through the same channel you used to buy it: the bank's internet banking or ATM for cash holdings, or your SRS operator for SRS holdings. Redemption requests have a monthly cut-off, and the money arrives early in the following month. The exact cut-off and payment timing are on the MAS SSB page.
What you get back is the full face value of the amount you redeem, plus the interest you have earned so far that has not yet been paid. If Farah redeems S$2,000 of her S$10,000, she receives S$2,000 plus the interest on that S$2,000 since her last half-yearly payment. The remaining S$8,000 stays invested on its original schedule. Redemptions are in set multiples, which MAS lists alongside the other limits.
Compare that with the bond in lesson 2.1, Price and yield move in opposite directions. That bond fell to 95.55 when market yields rose from 3% to 4%, because anyone buying it from you wanted a 4% return on a 3% coupon. If its holder needed cash that day, the only way out was to sell at 95.55.
An SSB does not trade between investors. When you want out, you sell it back to the Government, and the Government has promised to buy it back at face value in any month. There is no market price, so there is nothing for rising rates to push down. Rates could rise sharply the month after you buy, and your SSB would still be worth exactly what you paid for it.
That is the feature that makes SSBs unusual among bonds, and it is why they work so well for money you might need before the maturity date. You get a government bond's safety without the price risk that normally comes with a long maturity.
Leaving is free of capital loss, but not free.
The first cost is the step-up you give up. In lesson 3.1, How SSB step-up interest works, you saw that the later years pay higher rates. Leave after two years and you never collect years three to ten, so your average return is the lower two-year figure on the MAS table, not the ten-year one.
The second cost is any transaction fee charged on redemption, which MAS lists on its site. On a large holding it barely registers. On a few hundred dollars it can take a noticeable slice of the interest.
The third cost is timing. Because the money arrives the month after you ask, an SSB is not instant cash. Lesson 3.4 comes back to what that means for emergency money.
Sometimes a newer SSB issue pays much more than one you already hold. Then you can redeem the old one and apply for the new one. Whether it is worth it is a sum you can do.
Here is a made-up example. Farah holds S$20,000 of an older issue that she bought a year ago. Its schedule for the next three years, years two to four, is 2.1%, 2.2% and 2.3%. Kept for three more years, that pays 20,000 times 2.1% plus 2.2% plus 2.3%, which is S$1,320.
A new issue offers 3.0%, 3.0% and 3.1% for its first three years. On S$20,000, that is S$1,820. The difference is S$500.
Now subtract the costs. Redeeming this month puts the cash in her account early next month, and the earliest new issue she can apply for then is issued the month after. So the money sits for about a month in her savings account earning very little. One month of interest at the old 2.1% rate on S$20,000 is about S$35. Add the transaction fees for one redemption and one application, whatever MAS charges at the time. That leaves a gain of about S$465 less fees over three years, so in this example switching is clearly worth it.
The same sum can easily come out the other way. If the gap between the two schedules were small, a month of idle cash and two fees could wipe it out. There is also a risk on the application side. In a popular month the new issue could be oversubscribed, as lesson 3.2 described, so Farah might get only part of what she applies for and have cash left over to place elsewhere.
When you run your own comparison, use the real schedules from MAS for both issues, cover the same three-year stretch for each, and count the gap month and the fees before you decide.
Using two real SSB schedules from MAS, work out whether switching from the older to the newer issue would raise your interest over three years.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).