Fixed Income 101 - HSBC Asset Management Hongkong (2024)

Asset Management

Home
Funds
About us
About us
- About us
- Our governance
- Our investment approach
- Responsible investing
- Awards and recognition
Investment expertise
Investment expertise
- Investment expertise
- Fixed income (bonds)
- Multi-asset
- Active equities
- Liquidity
- ETFs
- Index-based investing
- Mutual Recognition of Funds
Investor resources
Investor resources
- Investor resources
- Investment academy
- Videos and Podcasts
News and insights
Contact us

Individual investor(selected)

Financial intermediary
Institutional Investor

Location Hong Kong SAR - 香港特區 languageHong Kong SAR - 香港特區

EnglishSelected
繁體中文

Change location

HSBC Asset Management

Contact us
About HSBC
Disclaimer

Skip to:

Introduction

A lot of people find bond investment boring. After all, the volatility range of debt securities tends to be narrower than that of equities, meaning that its potential return is also lower. Yet regardless of your investment approach - be it conservative or aggressive - do always include bonds in your portfolio. Why? Because such asset class may provide relatively steady return, and also balances out the risk of a portfolio.

Investing 101: Introduction to bonds

Bonds can provide potential income regularly and balance the overall risks of a portfolio. They are therefore indispensable in any comprehensive investment portfolio.

What is bond investment?

Advancing loans for regular income

Bond is a form of loans issued by governments or companies in order to raise funds. Such issuers promise to return the principal to investors (bond holders) upon an agreed date (also known as the ‘maturity date’). Before the bond is due, investors are liable to receive coupon payments regularly, which explains why bonds are also called fixed-income products.

Take a bond with a face value of USD100, coupon rate of 5 per cent and tenor of five years. Its holders can receive USD5 of coupon payment in the first four years and another USD5 plus the principal the final year. In the event of bankruptcy of the issuer, bond holders will get paid before stock investors.

Hedging default risks

Guard against default risks by heeding credit ratings

Buying a bond means lending to an issuer. Due to financial difficulties or bankruptcy, the issuer might not be able to repay the principal or coupon on time. A situation as such is called ‘default’. Credit rating agencies such as S&P Global, Moody’s, and Fitch Ratings usually grade a bond based on its issuer’s repayment ability. The higher the grade, the better the issuer’s fundamentals. Generally an issuer with lower default risks enjoys lower borrowing costs.

Bonds can be broadly classified into investment grades and non-investment grades. Those rated below BBB- by S&P Global are generally considered non-investment grade debts, or high-yield bonds. With higher default risks, these bonds tend to carry higher coupon rates than better-graded bonds, which is a reflection of their higher risk premium.

Bond prices and interest rates

Bond prices seesaw conversely with interest rate changes

The concept of yields is fundamental to bond investment because it measures the return on a particular debt security. The prices of bonds traded on the secondary market are dependent on the dynamics between supply and demand. A bond that sees higher demand will receive stronger inflows. That in turn pushes its prices up and drives down its yields, and vice versa.

Bond prices are also subject to credit ratings and interest rates. They are negatively related to interest rate changes. That means when interest rate rises, bond price will drop. The duration of a bond is likewise important as it indicates the sensitivity of the prices of a bond to interest rate changes. The longer the duration, the higher the volatility of the prices and yields of a bond.

Yield	Definition
Nominal Yield	The interest that an issuer pays annually as a proportion of a bond measured at face value, also known as coupon rate
Current Yield	The expected return of a bond in a year from now. It is calculated by dividing the coupon rate by the current bond price
Yield to Maturity	The total anticipated return on a bond held till maturity, normally expressed as an annual rate based on its purchase price
Yield to Worst	The lowest potential yield on a bond assuming the issuer does not default

Balance risks with bonds

Bond allocation helps a portfolio diversify its risks

In the universe of investment, bonds are generally considered to carry relatively lower risks than equities. Assuming the issuer does not default on its bonds, investors may expect to receive regular interest payments and the principal upon maturity. To lower volatility as much as possible, an investor tend to hold the bond to maturity. Of course there are investors trading on bonds for arbitrage. But since the threshold for bond investment is rather high, a lot of investors tend to gain relevant exposure through buying bond funds, as such strategy helps lower the entrance fee for investing in a basket of bonds.

Although the long-term return of bonds tends to be lower than equities, its volatility is also lower due to its vastly different characteristics. As a result, giving a certain weight to bonds or bond funds within a portfolio helps diversify investment risks and lessen its volatility.

Investing 101: The basics of bond prices, bond yields and duration

When yields rise, bond prices fall. The longer the duration, the more sensitive of the prices to interest rate movements.

Resources

Interest rate and inflation 101

Learning the relationship between interest rates and inflation is of utmost importance to successful investment.

Equity 101

Investing in equities unlocks potential returns from share price growth and dividend payouts.

Multi-asset 101

For long-term investors, building a multi-asset portfolio is the best way to manage risks.

Subscribe to our newsletter now

Subscribe now

Risk Warning

This page is prepared for general information purposes only and does not have any regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive it. This page does not constitute an offering document and should not be construed as a recommendation, an offer to sell or the solicitation of an offer to purchase or subscribe to any investment. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management (Hong Kong) Limited (“AMHK”) accepts no liability for any failure to meet such forecast, projection or target. AMHK has based on information obtained from sources it reasonably believes to be reliable. However, AMHK does not warrant, guarantee or represent, expressly or by implication, the accuracy, validity or completeness of such information.

Contact us Support and further information
Careers, media, investor and corporate information
Disclaimer Investment involves risk and past performance is not indicative of future performance. Please refer to the offering document for further details including the risk factors. The website has not been reviewed by SFC. Issued by HSBC Global Asset Management (Hong Kong) Limited.

Beginning of dialog window. It begins with a heading called "You are leaving the HSBC AMG website.". Escape will cancel and close the window.

You are leaving the HSBC Asset Management website.

Please be aware that the external site's policies will differ from our website terms and conditions and privacy policy. The next site will open in a new browser window or tab.

I understand, let's proceed Cancel

Save cookie settings

We use cookies to ensure that our website functions properly. To learn more please read Cookies policy.