In collaboration with the Cambodia Securities Exchange, The Phnom Penh Post is publishing a series of articles related to the securities market. This, the fourth in the series, focuses on bonds.
While stocks remain popular in the financial market, bonds present a further exciting investment opportunity.
Governments and corporations can raise huge amounts of capital by selling bonds to finance long-term projects such as infrastructure development.
Bonds have several characteristics that can make them a more attractive investment to stocks, especially for those who prefer less risk and are prepared for a long-haul venture.
What are bonds?
Bonds are a type of debt security that represent the amount of money investors lend to the issuer, which could be a corporation, a state-owned enterprise or the government.
Investors receive interest from the issuer periodically, and the entire principal amount is redeemed at a fixed date termed “maturity”.
Should a company plan to build a new manufacturing plant requiring $1 million of investment, it could for instance issue 100,000 units of bonds priced at $10 each instead of using existing funds or issuing stocks.
These bonds would receive five per cent interest per annum and have a three-year maturity period, for example.
People investing in the bonds would receive a fixed interest rate of five per cent per annum and their initial investment back after three years.
Bondholders can trade their bonds in the securities exchange with ease should they wish to convert their investment into cash. This makes investment in bonds more attractive than bank deposits.
Bonds are also usually less risky than stocks as the returns are not associated with how a company performs, while a bondholder will be paid first in the case of bankruptcy.
Five reasons to invest in bonds
Fixed and regular income: Investing in bonds is ideal for investors who are looking for a less risky investment. The return from the investment will be paid periodically and is fixed and guaranteed, providing bondholders with steady income. The face value – the principal sum – will be paid in full at maturity.
Tax incentives: Investing in bonds is subject to less withholding tax than fixed deposits at a bank, at three per cent compared to six per cent.
Based on the tax incentives from the Cambodian government, bondholders are entitled to receive a 50 per cent discount on withholding tax on bond interest.
Tradability: Unlike a fixed deposit, where the principal is only paid on the date of maturity or the depositor will lose their interest, bonds can be traded on the securities exchange. Bondholders can freely buy or sell on the market should they wish to convert their holdings into cash.
Repayment priority: Bondholders have a higher claim on a company’s assets, meaning they are given priority in terms of repayment should the company invested in be liquidated or go bankrupt.
Diversification: Investing in bonds offers an ideal alternative to increase financial safety in a portfolio. With bonds less susceptible to volatility than stocks, investing in bonds presents lower risk while alsobringing diversification to an investment portfolio.
Contributed by: The Cambodia Securities Exchange, Market Operations DepartmentEmail: [email protected]
Tel: 023 95 88 88 / 023 95 88 85
Disclaimer: This article has been compiled solely for informative and educational purposes. It is not intended to offer any recommendations or as investment advice. The Cambodia Securities Exchange is not liable for any losses or damages caused by using it in such a way.