(The) Boring Investor

There are several retail bonds shown on the SGX. How will you tell whether the 5.25% discount provided by Aspial’s 5-yr bond is too high or the 3.65% promotion offered by Frasers Centrepoint’s (FCL) 7-calendar year connection is too low? To look for the right prices for these bonds, you need to know what’s the credit history of the relationship and the Yield-to-Maturity (YTM) for bonds with similar rankings.

Unfortunately, the majority of retail bonds detailed on SGX are not rated. Alternatively, thanks to Bondsupermart, we now have benchmarks to look for the pricing and YTM for bonds with various rankings. The blue line in the figure below shows the YTM for bonds rated A3 by Moody’s (equivalent to A- by S&P / Fitch), which is the cheapest of all A-grade bonds. The red range shows the YTM for bonds scored Baa3 by Moody’s (equal to BBB- by S&P / Fitch), which is the lowest of most investment-grade bonds. Also shown in the amount in green is the YTM for the Singapore Government Securities (SGS), which give a risk-free come back for various connection maturities.

This green series is also known as the Yield Curve. The difference between a bond’s YTM and the yield curve at the same connection maturity is recognized as the pass on and is often used to measure the pricing of the relationship. Actually, you can construct a different series for each relationship rating, but also for ease of discussion, we will show only 3 lines in this amount. The YTM of retail bonds listed on SGX are plotted as purple points in the figure above. All the other retail bonds do not have any credit rating. We must estimate a possible credit rating for the relationship and following that, determine if it is overpriced or underpriced.

Using FCL’s 3.65% bond for example, the YTM is closer to the blue range (A3 / A- bonds) compared to the red series (Baa3 / BBB- bonds) as shown in the shape above. If we believe that FCL bond’s ranking is nearer to Baa3 / BBB- than A3 / A-, then its YTM should increase compared to that of Baa3 / BBB- bonds (i.e. price should decrease).

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How do you compute the price of a bond from its YTM and vice versa? There are simple tools to take action. One particular tool is submitted on the SGS website. Just enter the maturity time, coupon rate and YTM and compute the purchase price (or vice versa). 0.990, which translates to a YTM of 3.826%. If we think FCL’s connection should have a Baa3 / BBB- ranking, its rightful YTM should be 4.216% as shown in the number above. Finally, although we have no idea the credit rating of Aspial’s 5.25% relationship, Oxley’s 5.00 % Perennial and relationship.65% bond, all of them are priced above the red line, which means that the marketplace thinks they are not investment-grade bonds.

This is consistent with the evaluation predicated on Benjamin Graham’s requirements of earnings coverage and stock value proportion, which showed that 3 bonds (together with FCL’s 3.65% relationship) don’t have sufficient margin of security. Readers will have to evaluate for themselves if the higher coupons provided by the bonds are sufficient to compensate for the potential risks in investing in them.