Concorde Investments Ireland Ltd (“CII”) is authorised to offer investment services in transferable securities. This permits CII to offer clients access to investment opportunities in its range of international Government and Corporate Bonds.
Before entering into any transactions with us, we advise you to carefully read CII’s Risk Disclosure Statement which can be found on our website www.ciireland.com. The Risk Disclosure Statement provides you with information that will allow you to understand the nature and risk of the investment services we are providing you with and of the specific type of financial instrument that is being offered thus allowing you to take investment decisions on an informed basis. You will also be provided with a copy of our Risk Disclosure Statement together with our Terms of Business at the outset of your relationship with CII.
Below is information on Bonds which aims to help you understand the product. CII offers its investment services in certain Government and Corporate Bonds. We advise you to read this document before you consider investments into this type of financial instrument. If you have any questions on the content of this document or in relation to your investments you are asked to contact your investment advisor at CII.
Warning: The value of your investment may go down as well as up and you may get back less than you invest.
What are Bonds? – Definition
Bonds, or fixed income investments, are essentially loans from an investor to a company or government. Bonds are similar to a loan because when you purchase bonds, you are lending money to the entity who is issuing the bond (issuer). Bond investors receive periodic payments based on the interest rate at which the bond was sold, as the issuer is generally obliged to pay interest (Coupon) at set intervals (such as Quarterly, Semi-annually or Annually) over the bond’s life (term) and then repay the principal amount (nominal or face value) when the bond matures. This is why they are referred to as a fixed income investment.
A bond can be bought and sold on the secondary market, subject to there being sufficient liquidity in the market. The value or price of a bond may fluctuate due to a number of factors such as interest rate movements and the perceived credit worthiness of the issuer.
What is a Government Bond?
A Government Bond is a bond issued by a national government, generally with a promise to pay periodic interest payments and to repay the face value on the maturity date. Government Bonds are usually denominated in the country’s own currency. The terms by which a government can sell bonds depend on how creditworthy the market considers it to be. International credit rating agencies will provide ratings for the bonds, but market participants will make up their own minds about this.
In general, Government Bonds are considered to be subject to less risk than Corporate Bonds. This is simply because governments are less likely to default on their debt than companies, although this may not be the case with some emerging markets. Bond ratings give an indication of an issuer’s probability of defaulting and are based on an analysis of the issuer’s financial condition and potential to meet its payment obligations. While regarded as one of the safest financial instruments, Government Bonds still have the potential to perform poorly in negative market conditions and in extreme cases can even go into default. Long-dated Government Bonds will tend to be less liquid than their short-dated counterparts.
Examples of Government Bonds
DBR 1.50% 05/23: This is a German Government Bond with a 1.50% coupon that matures in May 2023. For example, suppose you bought 100,000 nominal at a price of 100.00. This means that you should receive a coupon of €1,500 (1.5% of 100,000) every year until you sell the bond or until the maturity date in 2023, when the German Government will repay the 100,000.
What is a Corporate Bond?
Corporate Bonds are issued by companies but they are split into different types depending on the credit rating they achieve. Corporate Bonds issuers might range from large established institutions with varying levels of debt to small, highly leveraged corporations with little operating history. Bond issued by companies that have high ratings are known as investment grade bonds, while bonds by companies with low ratings are known as high yield bonds because they have to promise higher income pay-outs in order to attract investors, however they also represent higher risk compared to investment grade. Bonds issued by companies that do not achieve ratings are known as „junk” bonds. Such bonds may offer a higher level of coupon payments but are subject to a greater risk of capital loss. While all bonds may suffer from poor performance in negative market conditions, bonds with a lower credit rating will tend to underperform relative to higher rated bonds. Conversely, bonds with a lower credit rating will tend to outperform higher rated (investment grade) bonds. Trading in the bonds of smaller companies is less frequent than larger companies and therefore may be subjects to periods of illiquidity.
The term ‘Corporate Bonds’ is very broad and can be categorized further by the type of issuer or its industry, ranging from industrials, manufacturers, financials, etc. The risk profile of Corporate Bonds relative to Government Bonds is the main differentiator. Corporate Bonds usually offer a higher yield (return) than Government Bonds because their credit risk is generally greater. This is not always the case, however, generally it is.
Example of a Corporate Bond
FIAT 5.25% 04/2023: This is a bond issued by Fiat, the motor car company, with a 5.25% coupon which matures in April 2023. For example, suppose you bought 100,000 nominal at a price of 100.00. This means that you should receive a coupon of €5,250 (5.25% of 100,000) every year until you sell the bond or until the maturity date in 2023 when Fiat repay the 100,000.
Note, the prices quoted in the above examples for Government and Corporate Bonds will vary over the lifetime of the bonds.
What is Yield?
It is the annualised return that is earned on a bond, based on the price paid and the interest payments received. The bond yield can be defined in different ways. The most common definition is yield to maturity. This is the total return an investor will receive by holding a bond until it matures, including all the interest received from the time of purchase until maturity, plus any gain or loss if the bond was purchased at variance to its par value. The Yield is a calculation of the discounted cash flows to maturity. Also, the term current yield is widely used, which is a function of the bond’s price and its coupon or interest payment, which will be more accurate than the coupon yield if the price of the bond is different than its face value.
It should be noted that a bond’s price will fluctuate during its lifetime and this will impact its yield. A bond’s yield moves inversely to its price. When a bond’s price rises, its yield decreases and conversely when a bond’s price falls, its yield increases. From the above example, of the German 1.5% 5/23, if it is purchased at 100 (PAR) per 100 nominal it will have a yield to maturity of approximately 1.5%. However, if it is purchased at a discount, for example 90 per 100 nominal the yield rises to approximately 4.82%. Similarly, if the price paid was at a premium at say, 103 then the yield would fall to 0.59. The yields also depend on remaining time to maturity as the yield calculation discounts future cash flows.
Where can I find information on the risks associated with bonds?
There are risks involved in Bond investments. Bond prices can be volatile. Please refer to our Risk Disclosure Statement for details on these risks which can be found on www.ciireland.com. Alternatively, please contact your investment advisor if you have any questions on the content of this document or in relation to associated risks. The overall market may fall, or the Bond that you invest in may underperform and can decrease in value in relative, but also in absolute terms. The value of your investment may go down as well as up. Past performance is no indication of future performance. This statement is also applicable to bond investments and includes investments into Government Bonds with high credit quality.