Introduction to Investment in Debt Securities​

For those interested in investment in debt securities, basic knowledge about debt securities are provided below.​

At present, each issue of debt security has a unique identification code comprising  alphabets and numbers. There are 2 types of debt securities identification codes in Thailand as follows:​​​​

International Securities Identification Number (ISIN) is used to identify the issue of debt securities traded in primary market and securities for transaction relating to the Thailand Securities Depository Co. Ltd. (TSD) operated at the BOT.

Thai BMA Symbol is used to identify the issue of debt securities traded in secondary market both by direct negotiation and by Bond Electronic Exchange (BEX).​

For bidding via BOT's electronic bidding (e-Bidding) system, there are two stated codes available. When the bidders choose one code, the system will also display the other of the same issue.

 

Samples of International Securities Identification Number (ISIN) and Thai Bond Market Association Symbol (ThaiBMA Symbol)​

International Securities Identification Number (ISIN) : TSD Web site

Thai Bond Market Association Symbol ​: ThaiBMA Web site (Thai version)

Sample of International Securities Identification Number (ISIN) and Thai Bond Market (ThaiBMA Symbol)​

​​Benefits for the issuers and the economy

​​​​​Less reliance on foreign source of funds.

More effectiveness in fund management as the issuers can exactly determine their borrowing costs and period.

Government debt securities can be used, by central bank, in monetary policy implementation in order to maintain liquidity and interest rate at a level appropriate to economic environment and stability.

​​​​​Benefits for the investors

Earn stable income 

Debt securities can be placed as collaterals with government agencies or financial institutions in many cases such as 

tender submission 

obligation under contract e.g. contract for building or road construction, drain pipe installation and  souvenir  production 

advance payment guarantee for employment 

education purpose honesty of employee and loan contract 

collateral for electricity consumption payment 

legal reserves maintained by commercial banks or financial institutions or as legal reserves that insurance companies maintain with the Department of Insurance 

​bail to the court or police station ​

respite for tax  payment 

bank loan or opening overdraft account with commercial banks 

requesting for a letter of guarantee

​​​​​Returns from investing in debt securities include:​​​

Coupon interest: The issuer has to pay coupons, usually twice a year, to the bondholders. Upon maturity, the principal of face value will be paid along with the last coupon.

Discount: It is the difference between the face value and the sales price when securities are sold below their face value. 

Capital gain or loss: Capital gain or loss may occur if a security is sold prior to its maturity.​

Price or value of debt securities is the present value of the stream of cash flows received from the remaining interest and principle. On the other hand, it can be called  the "time value of money". It can be approximately calculated whether the price should be above or below its par value by comparing the market rate (the required rate of return) with the coupon rate (the rate specified on the security).

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        ​​​​​​​​Example: A debt security with par value of 1,000 baht paying 6 percent coupon rate ​​​​

​​​​​​Case 1 market rate is 6 percent (equal to interest rate)

The price of this security should be equal to its par value of 1,000 baht, since there is no difference on rate of return between holding this security and investing in other kind of investment vehicles.

C​​​ase 2 market rate declines to 4 percent

The price of this security should be higher than its par value since a buyer is willing to pay more for getting a coupon rate of 6 percent, higher than other investment paying only 4 percent.

Case 3 market rate increases to 8 percent

The price of this security should be lower than its par value since a buyer has a chance to receive 8 percent from other investment which is higher than 6 percent coupon rate of this security. ​

​​​​Difference between Dirty Price and Clean Price

Normally, the debt securities are traded with the price including accrued interest (the interest accrued from the last coupon date to the trade date).  This price is called "dirty price or gross price".  The price excluding accrued interest is called "clean price".

​Debt Securities Price Calculation

For better decision making, investors can use bond price calculation program provided by the ThaiBMA or BEX.

ThaiBMA bond price calculation program

BEX Bond Calculator​​​

Government Bond Yield Curve is a curve representing a relationship between yield and the remaining time to maturity of government debt securities; whereby

Yield means a return received from a security, usually presented annually as a percentage. For example, yield of a five-year government bond equaling 2.39 percent per year means the bond holders will receive an average rate of return 2.39 percent per year.

Time to Maturity means the length of time remaining until the maturity, counting from present date to maturity date.  For example, the time to maturity of the ten-year National Savings Bonds issued on 2 September 2002 is 3 years and 8 months, as of 2 January 2009.

The picture below shows a domestic yield curve of Thai government debt securities as of 8 January 2009 established by the Thai bond Market Association (ThaiBMA).​

From the picture, investors can use the yield curve as a benchmark for decision making. For example, on 8 January 2009, the yields of five-year and ten-year government debt securities should be equal to 2.39 percent and 2.98 percent, respectively.

Besides providing reasonable yields for different time to maturity, the government bond yield curve is accepted as a risk free rate benchmark. The yield of the riskier securities should be added by risk premium spread. Furthermore, it is also used to calculate for mark to market value of debt securities​

1. Interest Rate Risk or Price Risk Or Market Risk ​ 

Interest rate risk is the risk that changing market interest rates will affect a security's price. The market price of a security varies inversely with the corresponding market interest rates. If  the holder sells a security before it matures while the prevailing market interest rates are higher than the security's coupon rate, the  holder may have to sell at the price less than the face value.​

2. Credit Risk หรือ Default Risk

Default risk is the risk that an issuer of a security will default, by failing to repay principal and/or interest in a timely manner.  This includes the risk that an issuer's credit rating will be lowered while the debt security has not reached its maturity. Government debt securities have very low credit risk, so their return tends to be lower than that of corporate debt securities.​​

3. Liquidity Risk

Liquidity risk is the risk that a debt security cannot be traded quickly enough at the appropriate price in the market. If  a debt security need to be sold quickly when the market is not liquid, it may need to be sold at a lower price. If a debt security are held until its maturity, the holder will not incur liquidity risk.​​

4. Inflation Risk

Inflation risk is the risk arising from a decline in purchase power. Typically, investments in government debt securities are on a long-term basis, and the coupon rates are normally fixed throughout the life of the debt securities. The  inflation will result in the  decrease in value of the coupon interest earned in each period and the  principal in the last period. This kind of risk  is indirectly included in the rate of return on debt securities and it varies directly with the time to maturity of the debt securities.​

More information on risks incurred from investing in debt securities (in Thai version)​

​​​Debt securities can be  traded through both primary market and secondary market. The details are as follows:​

Primary Market

The primary market is the market where the debt securities are sold to the investors for the first time. The sales can be divided into 2 channels as follows:​

 ​1. Sales to retail investors​​​

The purpose is to stimulate savings. Eligible buyers include individuals who are Thai nationals or residents, and non-profit institutions. The savings bonds are sold through selling agents appointed by the issuer, while the Bank of Thailand is responsible for supervising the sales, being a registrar  and a paying agent for interest and principal. ​

2. Sales to institutional investors through auction​

At present, government debt securities auctions are held by the Bank of Thailand in which bids  are separated into 2 categories; competitive and non-competitive bids.​

2.1 Competitive Bids:  ​

Bidders submit their bids specifying yields and required amount. Securities will be allotted first to the lowest yield (highest price) bidder, and then successively to the next higher yield bidders until the amount is not available. ​

2.2 Non-Competitive Bid

Participating institutions have to submit their bids through the primary dealers (designated by the Bank of Thailand) that are members of the e-Bidding system, and specify only the amount desired.

Successful bidders pay the price with the rate equivalent to the weighted average yield of accepted competitive bids. The Bank of Thailand announces the weighted average accepted yield along with the lowest and highest accepted yields via the BOT website and the e-Bidding system.​

Secondary Market

The secondary market means a market that provides for the purchase or sale of previously sold or bought securities taken place in the primary market. Seller in the secondary market is one who holds the securities and wishes to sell them. Trading in the secondary market can be done through the following channels:​

Over the Counter (OTC)  Unlike trades on the exchanges, buyers and sellers on the OTC market can negotiate directly with one another or via middlemen, called dealers, over computer networks or by phone. The trading price is thus dependent upon the negotiation between buyer and seller. At present, some financial institutions publish their bid and offer quotes on their own websites. Different financial institutions may provide different bid/offer quotes. In order to compare these quotes, therefore, buyers and sellers may need to contact several institutions. In addition, the yield curve may be used in assessing the securities prices. ​

Bond Electronic Exchange (BEX) is operated under the Stock Exchange of Thailand (SET). All debt securities including government and corporate debt securities, international financial institutions' debt securities, and debt securities issued under the Asian Bond Fund can be traded via the BEX. Investors wishing to trade debt securities via the BEX have to open securities account with member or brokerage companies.  << Click for list of member or brokerage companies >>  Trading occurs when investors place order through member or brokerage companies, who in turn, enter the order into BEX's trading platform and notify the result to the investor.​

​​​<< Click for list of member or brokerage companies >>​  Trading occurs when investors place order through member or brokerage companies, who in turn, enter the order into BEX's trading platform and notify the result to the investor.​​

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For further inquiries

Bond Management Team

Tel. 0-2283-6345