Debt Securities 債務證券

Investing in Debt Securities 債務證券投資

A bondholder is a creditor of the issuer: money is lent to a company, government or other issuer in return for contractual interest and principal repayment. These instruments generally have terms exceeding one year and emphasise income, although rising market prices can also produce capital gains; fixed income securities can have floating coupons.

Issuers include supranational organisations such as the World Bank and Asian Development Bank; governments; government-owned or sponsored bodies such as the Hong Kong Mortgage Corporation, MTR Corporation and Airport Authority Hong Kong; local governments; and companies. Credit risk varies between issuers, and corporate bonds may be secured or unsecured. A government or supranational name does not remove every investment risk.

The primary market handles new issues, with corporate issues commonly arranged by lead managers and underwriters. The secondary market handles existing securities, mainly through over-the-counter trading: brokers and dealers negotiate prices and terms such as transaction size and settlement date. A secondary market does not ensure an easy sale; thin trading may leave money committed until maturity.

Exchange Fund Notes issued by the Hong Kong Monetary Authority can be subscribed for through primary-market tenders and have also been listed on the Stock Exchange of Hong Kong since 2000. Exchange Fund Bills and Notes are HKSAR Government obligations issued for the account of the Exchange Fund and should be distinguished from bonds under the Government Bond Programme. [HKMA: Bond Market Development](https://www.hkma.gov.hk/eng/key-functions/international-financial-centre/bond-market-development/)

Par Value 票面值

Par value is the principal the issuer promises to repay at maturity, also called face value, maturity value or redemption value. Coupon amounts are normally calculated on par value, rather than the price paid in the secondary market.

The purchase price may exceed or fall below par value. Buying an ordinary bond at a premium does not increase its promised maturity repayment; receiving that repayment still depends on the issuer meeting its obligations.

Convertibility 可換股權利

A convertible bond allows its holder to exchange the bond for ordinary shares at a predetermined conversion price, for a specified number of shares and on specified dates or during a specified period. The shares may belong to the issuer or another company identified in the terms; conversion rights and timing depend on the issue terms.

The conversion right offers potential participation in rising share prices, so a convertible bond generally pays a lower coupon than an otherwise comparable non-convertible bond. Conversion is normally the holder's choice; once exercised, the relevant debt becomes equity, so the holder cannot assume that the same bond principal will also be repaid.

Coupon Rate 息票利率

The coupon rate is the annual interest rate promised by the issuer for calculating interest. Each coupon equals par value × annual coupon rate × the fraction of a year covered. A bond with HK$10,000 par value, an 8% annual coupon and half-yearly payments pays HK$400 each time: 10,000 × 8% × ½.

A fixed coupon uses the agreed rate throughout the bond's life; changing market rates do not automatically change it. A floating coupon resets periodically against a specified reference rate. Distinguish coupon rate from investor yield: different purchase prices can produce different returns from the same coupons.

Term to Maturity 期滿期限

Term to maturity is the remaining time from the valuation date until principal repayment is due; distinguish it from the original term at issue. Some investors classify 1–5 years as short-term, 5–12 years as medium-term and over 12 years as long-term. These are conventions, not statutory boundaries, and no additional rule should be invented to resolve their overlapping boundary.

The market background used in the 2023 reference notes describes Hong Kong bonds as rarely having original maturities exceeding 10 years, while US long-term bonds typically have 30-year maturities. This is a background comparison for that edition, rather than a legal limit on Hong Kong bond maturities.

Pricing of Bond 債券定價

Money has a time value: at a positive interest rate, money available today is worth more than the same amount received later. With annual compounding, future value equals principal × (1 + rate)^years; present value equals the future amount ÷ (1 + discount rate)^years. HK$100 invested for one year at 5% becomes HK$105; HK$100 receivable in one year has a present value of about HK$95.24 at 5%.

A bond's price is the total present value of its future coupons and maturity principal, discounted at the investor's required yield. A bond with HK$100 par value, two years remaining, a 2% annual coupon paid annually and a required annual yield of 5% is worth 2 ÷ 1.05 + 102 ÷ (1.05)², or about HK$94.42. The final HK$102 includes principal and the last coupon.

Match cash-flow dates, payment frequency and the discount-rate basis. The course uses compound interest; achieving yield to maturity as a compound return over the full remaining term also requires all payments to arrive as promised, holding to maturity and reinvesting coupons at that yield. The coupon rate alone neither supplies the discount rate nor guarantees the realised return.

Price and Yield Relationship 價格與收益率的關係

For an ordinary fixed-coupon bond redeemable at par, valued on a coupon date using a consistent interest-rate basis: market yield equal to coupon rate means a price at par; market yield above coupon rate means a price below par, called a discount; market yield below coupon rate means a price above par, called a premium.

New buyers compare the return with comparable investments. An existing bond's attractive fixed coupon supports a higher purchase price; a less attractive coupon requires a lower price to provide the required return. Other things being equal, rising market yield therefore lowers a fixed-coupon bond's price, while falling yield raises it.

An ordinary option-free bond with fixed cash flows generally has a convex price–yield curve. From the same starting point, the price gain from a fall in yield normally exceeds the price loss from an equally sized rise in yield; the changes should not be treated as perfectly symmetrical.

Yield Curve 收益曲線

A yield curve plots yields against their corresponding maturities, usually with maturity on the horizontal axis and yield on the vertical axis. Compare bonds with similar credit quality and other characteristics so that differences between issuers are not mistaken for maturity effects.

The course describes interest rates as containing three elements: a real risk-free rate, compensation for expected inflation and a risk premium for issuer default risk. Inflation expectations and required risk compensation can differ across maturities, so there need not be one market interest rate.

A normal or positive curve slopes upwards: longer maturities have higher yields. An inverted or negative curve slopes downwards and reflects expectations of lower future rates. A flat curve has similar yields across maturities and, in the course's simplified interpretation, indicates stable rate expectations. Humped, dipped and other shapes are irregular curves. These shapes are market signals, not guarantees of future rates.

Marketability 適銷性

Marketability means being able to sell a bond easily without a substantial price reduction; it is its liquidity. Listing or the existence of a secondary market provides a trading route but does not ensure enough buyers at all times.

Actively traded bonds usually have narrower bid–offer spreads and lower selling costs. With cash flows, credit risk and other factors equal, investors generally accept a lower yield to maturity, supporting a higher valuation. Inactive bonds may need to offer a higher yield to compensate for limited liquidity.

Bond Ratings 債券評級

A bond rating is a rating agency's opinion of credit quality and ability to meet obligations, based on financial and other issuer information. It is commonly used as an indicator of default likelihood. Major agencies include Standard & Poor's and Moody's; ratings can affect issue prices and the yields investors require.

Using the course's main categories, S&P's AAA, AA, A and BBB, and Moody's Aaa, Aa, A and Baa, are investment grade. S&P's BB or below and Moody's Ba or below are speculative grade, often called high yield or junk bonds. Do not mix the agencies' lettering and capitalisation; S&P's D indicates default.

A high rating generally indicates lower default risk, rather than guaranteed payment or a stable market price. Ratings can change. A downgrade may cause investors to demand a higher yield, reducing the bond's price.

International Markets 國際市場

Classification depends on the issuer's domicile, the issue market and the denomination currency. Domestic bonds are issued locally in the domestic currency by companies domiciled in that country. Foreign bonds are issued in a local market and its currency by foreign companies, subject to applicable local issuance and approval requirements.

Yankee bonds are US-dollar bonds issued in the US market by non-US companies. Samurai bonds are yen bonds issued in Japan by non-Japanese companies. Currency alone does not determine the name: the issue market and issuer's domicile also matter.

Eurobonds are denominated in a currency but issued and sold in markets outside the country of that currency. A US-dollar bond sold outside the United States may therefore be a Eurobond; the name does not require euro denomination.

The 2023 reference notes use freedom from regulation and tax as a simplified comparison for the Eurobond market; this is not a current legal conclusion covering every transaction. For example, public offers of unlisted debentures in Hong Kong generally require SFC authorisation unless an exemption applies, and debt-instrument tax relief has specified conditions. [SFC: Unlisted Shares and Debentures](https://www.sfc.hk/en/Regulatory-functions/Corporates/Unlisted-shares-debentures), [IRD: Qualifying Debt Instruments FAQ](https://www.ird.gov.hk/eng/faq/qdi.htm)

Advantages of Bond Investment 債券投資的好處

High-quality bonds can support longer-term capital preservation and income needs by providing scheduled cash flows that are easier to plan around. Bonds generally offer higher returns than money market instruments, and some have low to moderate risk; this description cannot be applied to every issuer.

Actively traded bonds can be sold before maturity, and derivatives are available to hedge some risks. These benefits are conditional: liquidity depends on the market, capital preservation depends on purchase price and issuer performance, and hedging does not automatically eliminate every risk.

Disadvantages of Bond Investment 債券投資的弊處

Price risk: rising market yields can reduce a fixed-coupon bond's market price, causing a loss on an early sale. Inflation risk: the purchasing power of fixed coupons and principal can fall even when payment is made. Fixed cash flows do not mean a fixed real return.

Credit risk: the issuer may delay or fail to pay interest or principal. Liquidity risk: a secondary market may lack buyers, requiring a price reduction or holding until maturity. Holding to maturity avoids a forced sale at the prevailing price but does not remove default or inflation risk.

Some bonds have high minimum denominations that ordinary investors cannot afford, and trading may involve sophisticated techniques. Ordinary bondholders normally have no shareholder voting rights and do not receive a proportional share of additional company profits; convertible bonds require separate consideration of their conversion terms.

Preferred Shares (Preference Shares) 優先股

Preference shares represent ownership in a company and are legally equity. The course discusses them alongside bonds because standard preference shares usually provide income at a fixed rate; this does not make their holders creditors.

For the standard preference shares considered in the course, sufficient profits are needed to pay the fixed dividend; it is not a debt obligation like bond interest. Preference shareholders generally have no voting rights but rank ahead of ordinary shareholders for dividends. On liquidation, their claims also precede ordinary shareholders' claims but remain behind creditors' claims.

Even exceptionally high profits normally do not increase this fixed dividend above its specified rate. Such shares therefore do not offer full participation in earnings growth and generally have limited capital appreciation potential. Preference shares are not common in Hong Kong; the issue terms determine the specific rights of an individual class.