What are iBonds?
The inflation-linked retail bond, also known as iBond is rolled out by the HKSAR Government under the retail bond issuance programme of the Government Bond Programme. iBond has a minimum denomination of HK$10,000 and a term of three years. Other key features include:
- Its half-yearly interest payments are linked to the average year-on-year inflation measured by the Composite Consumer Price Index (CPI), subject to a minimum interest rate, which is 2% per annum for the iBond issued in 2020, compare to the previous 1%;
- HKSAR Government will repay 100% of the principal amount at maturity; and
- It can also be traded on the Stock Exchange of Hong Kong Ltd (SEHK).
Some key benefits of investing in iBonds include:
- Strong credit: HKSAR Government has a strong, "investment grade", credit rating.
- Regular returns: Similar to other retail bonds, they offer regular payments of interest for the entire term of your investment.
- Interest rate: iBonds may offer higher interest rates than Hong Kong dollar time deposits of similar maturities.
Among the major risks you should watch out for include:
- Interest rate risk: While iBonds carry a floating rate of interest, their market value may decrease if the prevailing Hong Kong dollar interest rates increase during the term of the bonds, given the calculation of their rate of return is not benchmarked to the Hong Kong dollar interest rates.
- Index risk: The market value of iBonds with an interest rate linked to an index, ie,the CPI, may be affected by movements in that index.
- Liquidity risk: There may not be an active secondary market for iBonds and it may not be possible for you to sell them prior to maturity or the sale price may be lower than the purchased price.
- Credit risk: iBonds are not secured. You will be relying on the creditworthiness of HKSAR Government to receive your money back. Adverse changes in the wider economic conditions in Hong Kong and the world, as well as the creditworthiness of HKSAR Government may reduce the market value of your iBonds, and affect HKSAR Government's ability to make payments of principal and interest. In the worst case scenario, you could lose all of your investment.
- Intermediary risk: You can only hold iBonds indirectly through certain financial institutions whom you will have to rely on to perform a number of functions, including passing on payments of principal and interest to you and proving your ownership in the bonds.
Calculating the interest return
HKSAR Government will pay interest twice a year on the scheduled interest payment dates, the annual interest rate to be used will be as the higher of:
- The floating rate, being the arithmetic average of the year-on-year rates of change in the CPI for the six most recent preceding months, rounded to the nearest two decimal places; and
- The fixed rate, ie. the minimum interest rate.
The interest amount to be received is calculated based on this formula:
How to apply for iBonds?
You can apply through any one of the following channels﹕
- A placing bank；
- Hong Kong Securities Clearing Company Limited (HKSCC) (if you have an investor account with the HKSCC); or
- A securities broker (if the broker provides this service)
Trading in the secondary market
iBonds can be sold:
- through the SEHK if you hold the iBonds through the HKSCC direct or through a securities broker; or
- over-the-counter (eg to market makers appointed by HKSAR Government) if you hold the iBonds through a placing bank.
The trading prices in the over-the-counter market may be different from the SEHK. If you hold iBonds through a placing bank and wish to trade the bonds through the SEHK, you will need to instruct the bank to transfer the bonds from your bond account to your stock account with the bank, or transfer to your account with other securities brokers or HKSCC. You should check with the bank/securities broker/HKSCC how long the transfer will take and the fees involved.
If you want to buy iBonds in the secondary market, you can do it via your bank or securities broker.
Keeping track of iBond performance
Investors may be interested to know the performance of the iBond that they are holding or want to buy or sell. Apart from the interest return that paid twice a year, the performance of an iBond is also reflected by its change in market value. The market value of an iBond at any given time comprises its quoted market price and the accrued interest, i.e. the interest accumulated since the iBond's issue date or the last coupon date, whichever is later.
You may monitor the total return, which is sum of market value and interest received, of your iBond within any given time period through the Hang Seng iBond Index Series. The index series has a composite total return index that tracks the performance of a portfolio of all iBonds that are available in the market, as well as a total return sub-index for each of the iBonds. To know more about the index series and how you can make use of it to monitor the performance of iBonds, please visit www.hsi.com.hk/iBond.
23 Oct 2020