Debt Instruments – Notes or bonds

We are familiar with Government Bonds or sometime known as sovereign debts. The borrower is the government of a country. Investors buy into this bond with the hope of getting regular interest payments higher than the savings deposit rates. The risk involved is the possibility of the government defaulting. Since this bond is not secured, you may lose the principal amount in the investment.

 

The other debt instrument is the corporate bond or note issued by a corporate body. The same concept applies like the government bond, except that the risk of default for the corporate body is higher than the government. Hence, in order to entice lenders or investors to buy into this corporate bond, the interest payment (also known as coupon) will have to be higher than the government bond’s interest rate. Investors who are willing to take higher risk have to be compensated with higher returns. There are rating agencies, such as Standards & Poor, Moody’s, Fitch, who rate these corporate entities for the information of the investors. The better the ratings given, the better that the corporation will not default or goes bankrupt.

 

In a recent newspaper advertisement, Minibond Limited (registered in Cayman Islands) is issuing structured notes (Minibond Series 3) designed for investors seeking exposure in investments that provide steady yields * of quarterly interest payments of 5% * per annum on the S$-denominated Tranche A Notes. The scheduled maturity date is set at five & three quarters years later on 2 Dec 2012. The minimum amount to invest is S$10,000 and more can be invested in steps of S$5,000.

 

The Minibond Series 3 is credit-linked to the following financial institutions:

Barclays Bank, Citigroup, Deutsche Bank, Goldman Sachs, UBS and United Overseas Bank. These are termed as Reference Entities in the Pricing Statement.

 

* The risks in this investment are clearly spelt out in the Pricing Statement. The first risk is the Credit Risk of the Reference Entities. The notes are not principal protected nor capital guaranteed. The second risk is the Market Risk. If investor sells the notes prior to maturity date, you may receive an amount which is less than the amount invested. There is no assurance that there is a secondary market in the notes, i.e. no buyers. The value of the notes will fluctuate with the movements in the broader interest rate (e.g. US Fed rate, SIBOR rate, etc) and the corporate bond markets over the duration till maturity.

 

There is an option given to the issuer for early redemption on or after 3 years from the issue date. The notes may be redeemed at 100% of principal amount plus accrued interest.

 

Lehman Brothers Inc. is the arranger of the Minibond Series 3. The distributors of this notes are – ABN AMRO, CIMB-GK, DMG & Partners, Hong Leong Finance, Kim Eng Securities, Malayan Banking Berhad, OCBC Securities, Phillip Securities and UOB Kay Hian. There is no upfront sales charge.

 

The offer period for Minibond Series 3 is 8 January – 16 February 2007.

 

When investing in notes or bonds, do consider your risk tolerance of yourself carefully and take note of the risks associated with it.

 

Written on 1/15/2007 9:01 AM

 

Copyright © 2007, the author known as LKT in Singapore.

 

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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