Overview of what is a bond and why they are seen

?? ???à?T Flavia Cheong????A bond is a long term debt security. It represents debtbecause the investors ac-tually lend the face amount to the bond is-suer. However, unlike loans, bonds can be traded inthe open market, ie. the investor need not hold it to maturity or suffer a pe-nalty should he choose to sell the bond.????A typical bond (plain vanilla) specifies:????￡-the amount of the loan. The face a-mount or par valueis the amount that the bond issuer has agreed to repay. A typical face amount is S$1,000 for bonds issued by the Singapore government;????￡-a fixed date when the principal is due. The date on which the principal is required to be repaid is called the maturity date;????￡-if the bond is secured by a collateral. Investors of the Orchard 300 bond issued by Hallgaden Investment Pte Ltd ( a joint venture between Singapore Press Holdings and Lum Chang) have the first legal mort-gage rights to The Promenade, a commer-cial property at the heart of Orchard Road.????-The contractual amount of interest which is paid out either every six months or annually. The coupon rate is deter-mined largely by market conditions at the time of the bond's sale. Once determined, it is set contractually for the life of the bonds. However, some bonds have interest rates that fluctuate during the life of the bond, usually ata spread over a reference rate. These are called variable rate bonds or floating rate notes (FRN). ????One example of a fixed rate bond is the Singapore Government Bond 4.5% 03/00, the issuer is the Government of Singapore, the interest payable is 4.5%. The SGB's coupon is payable on a semi-annual basis, i.e. the Singapore Government will pay the investor 2.25% of S$1,000 or $22.40 every six months. The government promises to repay the principal in March 2000 to the investor. On the other hand,the DBS Land 4/00 FRN pays a coupon of 35 basis points over the 6 months Singapore dollar swap rate, where the referencerate is fixed every six months and the principal is due on April 2000.????Prior to the early 1980s, the bond market was comprised mainly of 'plain vanilla' bonds with simple cashflow structures, where coupon payments and maturity were fixed atthe outset. But since then, the market has progressed, and many securities in the bond market have options embedded in them. Examples include securities such as "callable bonds" and "puttable bonds". The former offers the issuer the option to redeem the bonds at an earlier date, and in this case, the investor is usually paid a pre-mium over the par value to compensate for the inconvenience. Suppose interest rates have fallen substantially since the bond was issued, then it would pay the issuer to redeem the bonds early and, at the same time, sell a new issue with a lower cou
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