Buying and selling

Transaction costs

Currently, you can buy bonds from brokerages or banks or subscribe directly from issuers during the Initial Public Offering (IPO) of the bond. If bonds are listed on the stock exchange, they can be traded like listed stocks. For unlisted bonds, investors can only trade them on the secondary market via their banks.

How can I buy and sell bonds?

  • You can subscribe for a newly issued bond via an IPO at its subscription price. You can also buy bonds that are already trading in the secondary market.
  • If the bond is listed on an exchange, trading process is generally similar to that of stocks listed on that exchange.
  • In the secondary market, bond dealers are connected via electronic terminals that display the latest information on indicative bond prices. Private negotiation usually happens offline between the buyer and the seller. Some brokerages may hold inventories of bonds that they wish to sell to their clients. A larger bid-offer spread is likely if a bond is infrequently traded.

Are there any liquidity concerns?

  • Whether you can sell your bond successfully at a satisfactory price depends on how liquid the market is. Some markets may have designated market makers to provide liquidity.
  • If your bond is puttable and you wish to sell it, the issuer is obligated to buy back your bond under conditions specified in the offering document.
  • Find out more information from your intermediary before investing.
  • Listing on the exchange does not necessarily mean that the bonds will have a liquid or an active secondary market.

What is the difference between public offerings and private placements?

A company may raise money through public offering or private placement of bonds.

Offering document of the bond must be in compliance with the content requirements (unless exempted by the SFC) and be registered as a prospectus under the Companies Ordinance before it can be offered to the Hong Kong public. Public offering allows the bond issuer to raise a large amount of money as any investors who can afford the investment can subscribe to the bond. Investors are able to get detailed information of the company from the prospectus such as its business and financial standing.

Private placement is another financing approach for a company. From the perspective of the bond issuer, it is a cheaper and faster way to raise money by directly offers the bonds to a limited number of investors or professional investors. In such case, the content requirement of the Companies Ordinance will not apply.

As offering documents of bonds offered through private placement may not have been vetted or authorized by the SFC, when asked to invest in such bonds, you should check if the bonds are authorized or regulated in other jurisdictions. Ask your adviser why he recommends such bonds to you and how your interests are protected. Be careful if you are asked to sign a written confirmation stating that you have requested to invest in such bonds and that you fully understand the offering document, don't sign it if that is not the case.

Remember: The authorization of the offering documents of bonds by the SFC is not an endorsement or recommendation of the bonds. Also, investing in such bonds does not mean that you are free from normal investment risks.

How are bond prices quoted?

The price of a bond is generally quoted as a percentage of the bond's principal. For example, if a bond has a principal of HK$100,000 and is quoted at 103, you have to pay HK$103,000 to buy it.

A bond's trading price in the secondary market may be quite different from the price you paid for it. This depends on many factors, such as the prevailing interest rates, any change in the credit rating of the bond, the supply and demand of similar bonds in the market, the price of the associated stock if the bond is "convertible" or "exchangeable".

Will I receive a bond certificate?

In the past, all bondholders received certificates that detailed the terms and conditions of the bond. Bearer bonds even had coupons attached to the certificate; when it was time to collect an interest payment, the investor (or bearer) detached the coupon and redeemed it with the issuer.

Today, most bonds are settled electronically. Issuers normally issue global certificates, which are deposited into designated clearing systems (like the Central Moneymarkets Unit operated by the Hong Kong Monetary Authority, Euroclear, Cedel, etc.). Intermediaries that trade bonds are usually participants of those clearing houses and hold accounts in their systems. Purchases and sales of bonds will be recorded electronically in the intermediary's account with the clearing system. No physical transfer of bond certificates is involved in the process. In other words, you do not normally receive a bond certificate for your investment. Your bond holding is reflected in the account statement issued by your intermediary. You rely on your intermediary to credit your account with payments credited to it through the clearing system and to distribute notices to you which it receives through the clearing system from the issuer.

What are the transaction costs?

Transaction costs may vary for bonds traded on stock exchanges and in secondary market. For example, if you buy a bond listed on the Stock Exchange of Hong Kong (SEHK), you will have to pay commission to your intermediary, trading fee to the SEHK and transaction levy to the SFC. Moreover, depending on how the bond is cleared and settled, charges for clearing, settlement (like transferring bond holdings from one brokerage to another) and nominee services (such as custody, interest collection fees) may be charged to your brokerage or bank. The intermediary will usually pass these fees (if any) onto you and may impose additional charges on you.

There is no standard fee structure in the secondary market. Some intermediaries may simply factor the transaction costs into the price quoted to you, resulting in a larger bid-offer spread. Others may levy a custodian fee, usually payable semi-annually, as a percentage of the principal value of your bond. Some may have more complicated fee structures, such as trading, transfer, custody and interest collection fees.

Generally, if you don't want to sell through the intermediary that has bought and held the bond for you, you may have to pay a fee before you are able to transfer and sell the bond at another intermediary's quoted price. You may have to open an investment account with a new intermediary before you are able to take advantage of a price quoted by that intermediary. It is important to clarify fees and charges to which you will be liable to pay before making your investment.