1. What are bonds? What are the characteristics of bonds?
  2. What is coupon? What is yield?
  3. What are the factors to decide the coupon rate?
  4. Is bond price related to yield?
  5. What is the present structure of our bond market?
  6. What types of bond are available on our bond market?Who are the issuers?
  7. Does our bond market follow the trend of international market?What are the primary trading targets?
  8. Who are the participants of our bond market?
  9. What are the advantages to invest in bonds?
  10. What are the risks to invest in bonds?
  11. Where can I find relative information regulations on bonds?
  12. Who are the supervisors of our bond market?

Q1.What are bonds? What are the characteristics of bonds?

Ans︰

Issuers collect fund for infrastructure or operation through issuing securities and retain liability at the same time. Issuers are obligated to repay the bondholder the principal amount and interest at a specific interval. In the mean time, this liquidized IOU is called "bond".
Bonds have the following characteristics:
(1) An IOU that represents debt, improves market flow and price movement
(2) Issuer: Could be government, financial institutions, corporations, foreign government/institutions, internationalized institutions or other corporate
entities. Therefore, there are various type of bonds.
(3) Fix-income (interest income) security: not affected by the operation and
financial status of issuers.
(4) Specific repay period: issuers are obligated to repay the principal amount at maturity.
(5) Some types of bond can be transferred freely, or as collateral and/or as a guarantee for business purpose.
(6) Some types of bond can registered as lost to avoid further payment of
Interest (except beared bonds issued before September, 1995).

Q2.What is coupon? What is yield?

Ans︰

Coupon is the interest rate stated on a bond when it's issued or the rate that bondholders can obtain from bond issuers. Yield is the rate of return on the investment during the period of holding bonds. Usually the period starts from bond holding day until maturity date, and this is called yield to maturity (YTM).

Q3.What are the factors to decide the coupon rate?

Ans︰

(1) The present interest rate and the capital of financial market
(2) The issued coupon of government bonds or other bonds under the same period
(3) Issuer's credit rating or whether it is bank guarantee
(4) The prediction of future interest rate
(5) Issuing period
(6)Various principal and interest payments methods
(7)Issuing amount

Q4.Is bond price related to yield?

Ans︰

Yes, bond price and yield has negative relationship. In other words, when yield rises, bond price falls. If bond investors outright purchase bonds then they will face capital lose. On the contrary, when yield falls, bond price will rise and investors will receive the capital gain.

Q5.What is the present structure of our bond market?

Ans︰

Our bond market includes:
(1) Issuing Market (Primary market): The period starts from issuer's planning stage to passes a series of procedures and finally until bond is handed to subscribers.
(2) Trading Market (Secondary Market):
The market for investors to trade bonds or for bondholders to sell bonds for cash. Recently, bond trading mainly deals in the TPEx and OTC market, only a few bond trading prosecutes on the main market. In order to make bond trading more smoothly and safely, TPEx sets up all kinds of regulations to standardize the market.

Q6.What types of bond are available on our bond market?Who are the issuers?

Ans︰

Different types of bonds include:
(1) Government bond:
issued by different governmental agencies and there are two types of bond: physical bonds and registered government bonds issued after September 1997 and are the most liquidized, lowest credit risk bonds. For example: Construction Bond and Taipei Municipal Construction Bond
(2) Financial bond:
issued by saving banks, profit banks who serve legal business or commercial banks. For example: bonds issued by First Bank, Chang Hwa Bank, and Shanghai Commercial and Saving Bank.
(3) Corporate bond:
public and private institutions issue bonds under the Company Law to raise capital for improving their financial status or for promoting their businesses. However, their credit ratings may be distinctly different.
(4) Convertible bond:
security issued by corporations. It combines the features of both bond and stock, which means bondholder could convert their bonds to issue company's common stocks.
(5) Foreign financial bond:
issued by foreign institutions (i.e.: Asia Development Bank, Central American Bank, European Investment Bank, North European Investment Bank) and priced in US dollar, Yen, and NT dollar.

Q7.Does our bond market follow the trend of international market?What are the primary trading targets?

Ans︰

Our bond market includes:
(1) Issuing Market (Primary market): The period starts from issuer's planning stage to passes a series of procedures and finally until bond is handed to subscribers.
(2) Trading Market (Secondary Market): The market for investors to trade bonds or for bondholders to sell bonds for cash. Recently, bond trading mainly deals in the TPEx and OTC market, only a few bond trading prosecutes on the main market. In order to make bond trading more smoothly and safely, TPEx sets up all kinds of regulations to standardize the market.

Q8.Who are the participants of our bond market?

Ans︰

Presently the main investors of bond market are TPEx trading brokers (bond dealers) which includes hybrid securities firms, financial institutions, notes companies, trust investments and etc. Among them, securities firms and note companies are the market-makers of our bond market and they are the contributors of market transaction scale and liquidity. Another types of investors are institutions (like Life assurance and insurance companies) and bond investment trust funds. As for individual investors, they occupy small portion of bond trading. All the investors mentioned above, only bond dealers and institutions trade OS/OP, RS/RP at the same time, bond investment trust funds trade mainly on corporate bonds and the rest of investors trade most on RS/RP.

Q9.What are the advantages to invest in bonds?

Ans︰

(1) Stable rate of return:
Usually bond has fix or float coupon rate and its principal and interest payments are paid back by the issuers in a certain period. Outright purchase investors could obtain fixed income and the return is higher than bank deposit rate. When interest rate falls, the investors could even enjoy capital gain. Convertible bondholders could even share the profit of booming of common stock price by converting their bonds to common shares.

(2) Lower risk:
There is no credit risk of government bond, and the financial bond and corporate bond issued by sound financial institutions are safer than the other securities.

(3) Higher liquidity:
Government bonds can be traded on the market anytime and are easy to be liquidized. Also they could be treated as deposit or court guarantee. Some bondholders also obtain capital from bond dealers by trading RS/RP and this deal will not affect their interest payments. However this high liquidity feature is not for all financial bonds and corporate bonds and it depends on issuers' credit rating and operating revenue.

(4) Low capital mobilization cost: Government bonds could always be collateralized, or used to raise capital by RP/RS trading with bond dealers. The borrowing rate usually is lower than the bank and the procedure is easier.

Q10.What are the risks to invest in bonds?

Ans︰

(1) Credit risk:
The risk that the issuers will be unable to make scheduled interest and principal payments. Bond rating reflects credit risk the higher the rating, the less the risk, and conversely, the lower the rating, the more speculative the investment. Change in ratings may affect the price
of the security.

(2) Liquidity Risk:
If market demand and supply is not in equilibrium and trading is not active then investors may not be able to sell at expected price because of market conditions.

(3) Interest rate risk:
The main factor to affect bond price is the volatility ofinterest rate and there are many factors that affect the interest rate such as the Central Bank currency policy, inflation, boom and bust, and international economy.

(4) Call risk:
The risk that the issuer may call, or redeem, all or a portion of The outstanding bonds prior to maturity date. This optional call feature may be at a premium or at par and may occur only on stated dates. When rates fall, an issuer may opt to call bonds, then refinance the project at the prevailing lower rates.

(5) Other risk: The risk of counterfeiting and lost.

Q11.Where can I find relative information regulations on bonds?

Ans︰

The regulations on trading and settlement are all listed on "Taipei Exchange Rules Governing Securities Trading on the Taipei Exchange" and investors may search relative regulations by clicking "Law inquiries" under TPEx website.

Q12.Who are the supervisors of our bond market?

Ans︰

Financial Supervisory Commission is the competent authority of our bond market. Taiwan Stock Exchange and TPEx are authorized by FSC to supervise main market and TPEx market respectively.