Brokerage
Bond
Introduction
A bond, also known as fixed income security, is a debt instrument for an entity (including corporations, governments and its institutions) to issue to its holder. In other words, bond holder is lending money to bond issuer. Bond Issuer is obliged to pay its holder interest (the coupon) during the period of bond tenor and repay the principal at the maturity date.
Bond issued by government and its institutions has a relatively lower risk to corporate bond. US treasuries are even considered as a risk-free instrument because they are backed by the US government. Funds that entities raise by bond issuing can be widely used for different purposes as shown below.

Government: Debt repayment and fiscal budgeting expenses
Government Institutions: Infrastructural facilities expenses and social welfare expenses
Corporations: Operational expenses, mergers and acquisitions, capacity expanding as well as debt repayment
Common types of bond
(1)
Perpetual bond - Relatively low liquidly with no maturity date that pays a steady stream of coupon payments
(2)
Callable bond - Issuer has the right to redeem prior to its maturity
(3)
Puttable bond - Bond holder has the right to sell back to the Issuer at specified dates before maturity
(4)
Convertible bond - Bond holder has the right to convert the bond at a specified conversion price into a specified number of unissued shares of the issuer or a related company.
(5)
Exchangeable bond - Bond holder has the right to exchange the bond for the shares of any organization which are already in issue and held by the issuer or a related company.
(6)
Fixed rate bond - Bond that pays the consistent predetermined fixed payments periodically of its entire term with no impact of interest rate fluctuation.
(7)
Floating rate bond - Variable coupon payments are tied to a benchmark such as LIBOR, HIBOR or US treasuries rate, plus a quoted spread. Thus, coupon rate varies by a benchmark movement.
(8)
Zero coupon bond - Pays zero coupon of its entire term that is issued at a discount price lower than its face value, with face value repaid at maturity. Thus, it is also known as a discount bond.
Advantages of bond investment
(1)
Bond has a simple and uncomplicated structure with a variety of options
(2)
Bond has a foreseeable cash flow and return
(3)
Bond has a relatively lower risk to equities investment
(4)
Bondholders have higher seniority than shareholders when a company declares bankruptcy or liquidates.
Bond Trade Flow
  • Open an account with CMSHK and complete Client Risk Profiling Questionnaire
  • Make a call to your Account Manager for Bond price quoting and order placing
  • You will be notified by Account Manager and receive a daily statement on the next day when your order is successfully executed.
  • Trading amount will be deducted from your account on trading date.
Bond Credit Rating
Bond Risk RatingInternational Credit Rating
S&PMoody'sFitch
PrimeAAAAaaAAAInvestment-Grade
High GradeAA+ / AA / AA-Aa1 / Aa2 / Aa3AA+ / AA / AA-
Upper Medium GradeA+ / A / A- / BBB+ / BBBA1 / A2 / A3 / Baa1 / Baa2A+ / A / A- / BBB+ / BBB
Lower Medium GradeBBB-Baa3BBB-Non- Investment Grade
Lower Grade,
Speculative or In Default
BB+ / BB / BB- / B+ / B / B- / CCC+ / CCC / CCC- / CC / C / D /NR Ba1 / Ba2 / Ba3 / B1 / B2 / B3 / Caa1 / Caa2 / Caa3 / Ca / C / NRBB+ / BB / BB- / B+ / B / B- / CCC+ / CCC / CCC- / CC / C / D / NR
Key Risks
Interest Rate Risk
Bond prices and interest rates have an inverse relationship. When the interest rate rises, bond prices will generally fall, and vice versa. The longer the bond tenor, the more sensitivethe bond price changes relative to interest rate.
Credit/Default Risk
The risk that the issuer fails to make the coupon and/or principal payment on schedule, or a potential total loss is caused when issuer is in default.
Liquidity Risk
The risk that the bondholders might not be able to sell their bond quickly due to low liquidity in the market.
Exchange Rate Risk
The risk that the bondholders invest in a foreign currency denominated bond that may receive less local amount when foreign currency depreciates against local currency.
Factors to be considered before the purchase of bonds (What an investor should know)
Risk – Investor needs to take all risks into consideration, which include but are not limited to interest rate risk, credit/default risk, liquidity risk and exchange rate risk.
Tenor – The longer the bond tenor, the more sensitive the bond price changes relative to interest rate. When the interest rate rises substantially, bondholders would suffer a loss when they sell the bond before maturity due to bond price falls.
Issuer - Take into consideration the ability of Issuer to make coupon and principal payments.
Relative Return: Since there are a wide range of bonds in the market; the same type of bonds which have the same credit rating or tenor should yield similar returns. However, if bond prices differ substantially, investors may choose to purchase bonds of the same rating at relatively lower price.
FAQ
Q
Can I purchase a bond with a higher risk rating than my investment appetite as a result of my Client Risk Profiling Questionnaire?
A
No. Investor can only invest in a bond with a risk rating equal to or lower than individual investment appetite.
Q
Which currency of bond can we trade?
A
Chine Merchants Securities (HK) Co., Limited (“CMSHK” or “we”) can execute client's trading instructions for bonds denominated in Hong Kong Dollar, U.S. Dollar, Renminbi, Euro, Pound Sterling, Australian Dollar, Singapore Dollar and Canadian Dollar. However, CMSHK only accepts client deposits in Hong Kong Dollar, U.S. Dollar and Renminbi. In case client has purchased bonds denominated in a currency other than the three acceptable currencies, CMSHK will convert sufficient amount from that currency into one of the acceptable currencies at the prevailing exchange rate for the purpose of completing the settlement process.
All information contained herein is for reference only. Investors should fully understand the abovementioned (and any other) risks before carrying out any investment decision. We encourage you to be vigilant and our team is working in its best endeavors to assist you and answer your questions. Please contact us here [link] if you have any enquiries.

If there is any inconsistency or ambiguity between the Chinese and English versions, the English version shall prevail.