If you are looking to diversify your investment, you need to consider buying Hong Kong bonds. Unlike shares, this type of investment is all about borrowing money. This time, however, you (as the investor) act as the lender.
When a company or local government wants to launch a project, they do not always have to dip into their own pockets to finance it. They can issue bonds to investors – people like you. After buying bonds, the issuer will pay it back with interest.
The payments are usually predetermined and guaranteed – unless the company or the government declares bankruptcy. Bond investments are usually characterized by the low-risk and the low return on investment. If you want to secure some of your investment money, it is wise to place some of it in bonds.
Hong Kong bonds offer a low-risk option for investors in the region and even overseas. It is being used by the government to fund the long-term development of the Hong Kong market. This is according to the publication from the Hong Kong Monetary Authority.
In fact, back in 2009, the Government Bond Programme was introduced by the government to encourage local investors to fund projects and attract issuers from overseas.
The programme is also meant to support the development of the debt market through the benchmarking of yield curves and managing a steady and continuous public debt securities supply.
First, do your research about bonds in Hong Kong
If you want to invest in Hong Kong bonds, it is very important that you understand specific details about it first. There are 5 bond features that you need to learn.
- This is the company or organization that is borrowing the money. The name of the bond will depend on who the issuer is. If they are from the private sector, it will be called corporate bonds. If it is issued by the government like Exchange Fund Notes, you call them government bonds.
- This refers to the par value of the bond or the amount that will be repaid to you when the bond matures.
- Coupon rate. This is the interest rate that will serve as your profit when the issuer pays you back. This is usually paid in instalment at regular intervals (e.g. annually, quarterly, etc). There are two ways to classify this rate: fixed and floating. The former means the rate stays the same throughout the term of the Hong Kong bonds while the latter is reset periodically based on predetermined benchmarks (e.g. HIBOR).
- This simply refers to the life of the bond. It is typically a couple of years ranging from 3 to 10 years. It is possible for a bond to not have a fixed maturity date – this is called a “perpetual” bond.
There are instances wherein the bond is guaranteed by a third party. In case of the issuer defaults, the guarantor will pay you for your investment.
Steps to buy and sell bonds in Hong Kong
After doing your research, here are the important steps that you need to follow when buying Hong Kong bonds.
Step 1: Know what bond you want to invest in.
As mentioned, the name of the bond depends on the issuer or nature of the bond. Here are your options:
- Corporate bonds – issued by companies or subsidiaries.
- Government bonds – issued by the government and the most low-risk investment. The Government Bond Programme offers the iBond or the inflation-linked retail bond that residents of Hong Kong can buy. The latest release has a maximum size of HK$10 billion and can pay you once every 6 months. This rate is linked to the local inflation in the region with a minimum rate of 1%.
- Perpetual bonds – bonds that do not have a fixed maturity date and can provide a steady source of interest.
- Callable bonds – the type of bond can be repaid by the issuer even before the maturity date.
- Puttable bonds – this bond will let you sell the bond to the issuer based on a predetermined value.
- Convertible bonds – this bond allows you to convert a bond into shares of the issuer’s company – should you feel that you can take on more risks.
- Exchangeable bonds – this bond is the same as the convertible bond but you can convert it into shares of an organization that the issuer holds.
Step 2: Choose how you will buy.
Buying Hong Kong bonds can be done through brokerage firms or through financial institutions like banks. You can browse through the list of brokers and traders through the Hong Kong Exchanges and Clearing Limited website. It is also possible for you to go directly to the issuer – as long as it is during the band’s official Initial Public Offering (IPO).
Step 3: Pick where you will buy.
There are three options for you to buy Hong Kong bonds.
- From the issuer: As mentioned, you can directly buy the bond from the issuer when the IPO is issued.
- The stock exchange: There are bonds that are listed on the stock exchange and can be bought in the same way as shares.
- The secondary market: These are unlisted bonds that can be bought through banks or bond dealers. It is possible to negotiate the price of the bond and it is usually done in private. There are brokerage firms who list inventories of bonds that they sell – something that you can choose from if you wish to buy from this option.