Home' Trinidad and Tobago Guardian : December 21st 2014 Contents SBG4 | COVER STORY
December 21 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
Perhaps you have bought a
bond, or have invested in a
mutual fund that has bonds
as a part of its portfolio. You
are not alone. The Central
Bank's economic bulletin of
September 2014 says that Trinbagonians have
invested some $34,214.5 million in TT income
Maybe you've been thinking about making
an investment in bonds, especially since they
have been in the news, with the Government's
issue of a $2.5 billion, 12-year, fixed-rate bond
at a coupon rate of 2.8 per cent only attracting
$1.45 billion, meaning it was undersubscribed
by just over $1 billion.
That was the second bond in just over a
year that failed to attract the amount of money
that the Government had expected, which
surprised some market watchers as Govern-
ment of T&T bonds are almost always heavily
In August 2013, the Government floated a
$1 billion, 10-year, fixed-rate bond at a coupon
of 2.5 per cent that only attracted bids of $895
Explaining the failure of the bond to meet
its subscription, the Central Bank said: "Insti-
tutional investors may have held back from a
government bond paying 2.5 per cent in favour
of shares owned by the government bank with
an indicative dividend yield of 4.75 per cent."
Even if this is one of many possible reasons
why the bond was undersubscribed, the impor-
tance of the interest rate in the equation is
hard to ignore. And bonds share an interesting
relationship with interest rates as we will see
later. But first, we should get into what are
Bonds are a debt investment, where a gov-
ernment or corporation essentially borrows
money from the public to raise money at a
fixed or floating rate of interest.
The Central Bank public education pam-
phlet, "The Government Securities Market in
Trinidad and Tobago" says: "Budget financing
is the traditional reason why governments
issue securities...To meet a budget shortfall,
governments usually raise the shortfall through
the issue of medium or long-term securities."
The bond is sold at a par or face value. This
is the money that is repaid to investors once
the bond matures or reaches the end of its
life. There is an interest rate or coupon at
which the bond is initially issued. The bond,
however, is also subject to the market.
Independent financial consultant, Ian Narine,
"Most investments have two elements of
return. The first is the income that it can gen-
erate and the second is any price movement
in the investment itself. A bond is no different.
There is the income that comes from the inter-
est rate paid and then there is the return that
is based on the price movement."
The price movement is caused by prevailing
interest rates in an economy as bonds are sen-
sitive to them.
For example, when a bond is bought with
a coupon rate of 3 per cent and prevailing
interest rates increase by 1 per cent, anyone
hoping to buy the bond would want to pay
less for it, as they would have to forego the
returns offered at 4 per cent.
Conversely, if a bond is issued at 5 per cent
interest and prevailing interest rates decrease
to 3 per cent, purchasers would be willing to
pay more for it as it offers a higher rate of
return in a low-interest rate environment.
Remember, the interest rate for bonds is fixed.
Bonds, therefore, experience an inverse rela-
tionship with interest rates. When interest
rates increase, the price of bonds decrease and
when rates fall, the price of bonds increases.
So how does this affect you if you have
invested in bonds, in a mutual fund that has
bonds as part of its porfolio, or you have
invested in a bond fund, which is an combi-
nation of different bonds in a fund ?
Narine said in the case of a bond fund,
investors could see themselves losing.
"The value of the portfolio is the sum of
the price of all the bonds in the portfolio. If
therefore interest rates are rising then, all other
things being equal, the price of the bonds in
the portfolio will fall. A falling price will mean
a lower portfolio value."
He said the challenge here would be for the
portfolio manager to manage the price move-
ments so that "the value of portfolio is as
stable as possible thus allowing the investor
to benefit from the income generated by the
Interest rates, or more specifically, the repo
rate has risen by 50 basis points over the past
three months from 2.75 per cent to 3.25 per
In considering what this change in interest
rate may mean for investors, Narine said one
has to consider that there are different interest
"When we speak about rising interest rates
we have to appreciate that there are many dif-
Bonds in a bind ?
Continued on Page 5
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