There are factors to consider before you decide to invest in bonds, such as the risks associated with bond investments as well as the prevailing market price of the bond in the secondary market, if applicable, before you purchase it.
What are my risks if I invest in bonds?
When you invest in a bond, you are lending money to a bond issuer.
One key risk is the issuer defaulting on its coupon payments or principal repayment to you. Market conditions, business, legal, and regulatory risks may affect the issuer’s ability to pay you the bond coupon, or to repay the principal amount, for as long as you own the bond.
Other risks such as interest rate and market liquidity risks may affect the value of your bond if you choose to sell the bond before maturity.
You should also be mindful of other risks such as inflation.
Default Risk
A payment default occurs when a bond issuer fails to pay you the coupon due or repay the principal amount of your bond at maturity.
Different issuers have different levels of credit quality and hence different levels of default risks, depending on their financial health, amount of debt alongside other obligations, and changes to these over time.
Credit rating agencies use their own quantitative and qualitative methodology and criteria for rating issuers or their bonds. Historical data on the default rates for different levels of credit rating may also be useful data points.
Be mindful that defaults have historically happened even for the highest credit rated bonds, and that past default rates may not be indicative of future default rates.
It is very important for you to understand the credit quality of an issuer before deciding to invest in its bond.
For Temasek Bonds, if the issuer is unable to pay the coupon due or repay the principal amount due at maturity, Temasek Holdings (Private) Limited is obliged to step in as the Guarantor to meet these payment obligations.
If the Guarantor becomes insolvent, holders of Temasek Bonds and other equally-ranked creditors will rank ahead of the Guarantor’s shareholder in terms of payment priority. Please also note that the Guarantor is an investment company that is substantially dependent on its Investment Holding Companies (IHCs) and portfolio companies for funds, and the Guarantor’s claims over assets and earnings of its IHCs and portfolio companies rank behind creditors of these companies.
Market & Business Risks
Macroeconomic, market and geopolitical conditions in major economies may impact global monetary conditions, investors’ confidence and risk appetite, as well as underlying growth prospects and global asset prices.
As an investment company, the value of Temasek’s portfolio is affected by such market factors.
Furthermore, Temasek’s cash flows and ability to meet debt repayment obligations are dependent on the dividends and distributions from our portfolio, our divestments and our ability to borrow. In particular, dividends and distributions are made by our portfolio companies at their discretion and are subject to their profitability and cash flows, among other considerations.
Should any of our portfolio companies run into financial difficulties, our claim as a shareholder would generally rank behind creditors of such a company.
Legal & Regulatory Risks
Companies and businesses operating around the world must comply with a complex set of different legal and regulatory requirements, which may change or evolve in ways that may have an impact on their existing business. They may face regulatory action or litigation by regulators or other parties.
Temasek and our portfolio companies are subject to similar risks. These may result in significant costs or losses to Temasek or our portfolio companies and could impact Temasek’s ability to meet debt repayment obligations.
Interest Rate Risk
The price of a bond may rise or fall.
If interest rates rise, the price of your bond may fall, in order to attract buyers who have higher interest alternatives.
If the price at the time you choose to sell your bond is below your purchase price, you may suffer a loss.
There is no guarantee on the price of Temasek Bonds.
You can check Temasek’s bond prices in a few ways:
Liquidity Risk
Under certain situations, such as a difficult or illiquid market, there may be no buyer for your bonds should you need to sell them, even when they are listed.
There is no guarantee on the market liquidity of Temasek Bonds.
Inflation Risk
Inflation will lower the purchasing power of the fixed coupon payments and the principal amount at maturity of any bond.
