A new type of government bond targeted at retail investors will be launched in the second half of this year.
The Singapore Savings Bond aims to provide a flexible, low-risk option for investors to park their long-term savings.
The Sunday Times answers some frequently asked questions about the product.
How long can I invest for?
The bonds have a term of 10 years but you can redeem them in any given month before they mature with no penalty.
This differs from most other bonds, which have a set interest rate and investors can find themselves out of pocket if they redeem them too early. How much can I invest?
People will be able to apply for each bond issue with as little as $500, and up to $50,000. They will be able to hold up to $100,000 of the Savings Bonds at a time.
If a particular issue is oversubscribed, you may not get the full amount you applied for. If this happens, you could apply for the issue in the following month.
The Government has said it could potentially issue between $2 billion and $4 billion in Savings Bonds this year, depending on demand.
How much returns will I get?
Singapore Savings Bond interest rates will be linked to the long-term Singapore Government Securities (SGS) rates.
But unlike SGS bonds, which pay the same interest rates every year, the new product will pay coupons that step up over time.
The average interest investors will receive over the period they hold Singapore Savings Bonds will match what they would have received had they bought an SGS bond of equivalent tenure.
This means that if you hold your Savings Bond for the full 10-year term, the average interest per year on your investment will match the return if you had invested in a 10-year SGS bond.
The 10-year SGS has mostly yielded between 2 and 3 per cent over the past 10 years.
You can cash out on the Savings Bonds at any time, subject to a one-month window.
In return, you get the principal sum, which is guaranteed by the Government, along with whatever accrued interest you have earned.
However, if you decide to redeem your Savings Bond early, the average interest per year will be lower than that of the 10-year SGS yield.
Singapore Savings Bonds will be issued monthly and the interest rate schedule for each issue will be announced before applications open.
Will I make or lose money if interest rates change?
Once a Savings Bond is issued, interest rate changes will have no effect on the bond's principal value and interest payments.
The bonds will always be redeemable at par, regardless of interest rate movements, and the interest rate schedule is locked in upon issuance. This is unlike conventional SGS, whose values fluctuate with interest rate movements.
However, future interest rate levels could turn out to be higher (or lower) than the rates you receive from your Savings Bond holdings.
You can redeem your Savings Bond for the full invested capital with no penalty and apply for new Savings Bond issues with higher interest rates if you think this is more attractive. Before you do this, you will have to consider whether a new Savings Bond with lower initial interest payments outweighs the stepped-up coupons you will be receiving on an existing Savings Bond that you may have held for some years.
When can I start buying Savings Bonds?
Applications for Savings Bonds will open in the second half of the year.
The Monetary Authority of Singapore (MAS) will announce the launch date one month before applications open for the first Savings Bond issue. How do I apply for Savings Bonds? How do I redeem my Savings Bonds?
Applicants need a DBS/POSB, OCBC or UOB bank account and an ATM card.
This is because applications will be through ATMs. DBS/POSB customers may also apply through Internet banking.
You can also submit redemption requests through ATMs of the participating banks, or Internet banking portal.
Applications and redemption requests must be made in multiples of $500, and Savings Bonds will be available only for purchase using cash.
You also need an individual (not joint) CDP securities account with direct crediting service activated. You must be at least 18 to open an individual CDP securities account. What are the fees and charges involved?
The bank will charge a transaction fee of $2 for each Savings Bond application and each Savings Bond redemption request. The transaction fee of $2 will still apply if your application or redemption is unsuccessful. It will not be refunded.
Compared with other products, the fees are low, said analysts. SGS bonds also incur a $2 transaction fee but there are also other such fees, like broker fees. Investing in equities also incur broker fees.
When is interest paid?
Interest is paid every six months on the first business day of the month. The first interest will be paid six months after you get your Savings Bond. Are Savings Bond interest payments taxable?
Interest income on Savings Bonds is exempt from tax.
Am I allowed to transfer or sell my Savings Bonds to someone else?
No. Savings Bonds cannot be transferred to someone else except in specific situations such as in the event of death of the individual or under a court order. Savings Bonds cannot be bought or sold in the open market or traded on the share market.
What are the pros and cons of Savings Bonds?
Singapore Savings Bonds combine the flexibility of a short-term investment, the affordability of a low-cost product and the stability of a long-term government bond. Usually a bond investor must choose his bond tenure and lock the money in. He cannot cash out until the bonds have matured but can trade the bonds on the stock market. Trading comes with the risk of price fluctuations.
Savings Bonds will not be traded and so there is no risk that an investor gets back less than his investment.
The flexibility also gives Savings Bonds an edge over a fixed deposit with a bank, which pays no interest if the principal is withdrawn before the account's maturity. The minimum investment of $500 is also more affordable than many other financial products. SGS bonds require a minimum investment of $1,000 while most banks require $1,000 to $5,000 in minimum savings for a fixed deposit.
Savings Bonds can be seen as an extremely safe investment as they are backed by the Singapore Government just like SGS bonds, which have the top AAA credit rating with all key rating agencies.
However, Singapore Savings Bonds have some drawbacks compared with other time financial products. Unlike SGS bonds, Savings Bonds are not tradable.
The cap on the investment amount also renders Savings Bonds less attractive to institutional players with a bigger appetite.
But Savings Bonds are intended for smaller investors and the MAS does not envision the low-cost retail product catering to institutional investors.
How do the Savings Bonds compare with other investments such as corporate bonds?
Savings Bonds are backed by the Singapore Government, which has the top AAA credit rating with all key rating agencies. Corporate bonds, such as those issued by Frasers Centrepoint last Wednesday, carry credit risk.
The property firm's first retail bond offering is now open for subscription and closes on May 20 at 12pm.
The minimum investment amount is $2,000, or higher amounts in multiples of $1,000.
Although Frasers Centrepoint is a "good name", there could be periods such as during the global financial crisis when companies go through difficult times and are unable to repay debt, resulting in capital loss, said Mr Victor Wong, investment director at Financial Alliance, a Singapore-based advisory firm.
As corporate bonds carry more risk, the yield for Savings Bonds is lower compared with corporate bonds of similar tenor. "If investors want a higher yield and are comfortable with the credit risk, then they can invest in a corporate bond," said Mr Wong.
Head of deposits and secured lending at DBS Bank Singapore Lui Su Kian said that for investors, fixed deposits also "allow for a wide range of tenors and deposit sizes, and customers are also able to diversify their portfolio by having fixed deposits in different currencies".
This article was first published on May 17, 2015.
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