onservative investors, bonds also
provide greater protection. E-quity investors are the last
in line of all those who have a claim on the assets and
income of the corporation. In a liquidation of the firm's
assets, bondholders and other creditors will have to be paid
first. For a firm not in liquidation, shareholders have
claim to part of the operating income left over after taxes
and interest to bond hold-ers have been paid. For secured
bonds, in-vestors have the legal right to the asset that has
backed the bonds. Some bond cove-nants provide further
protection to the in-vestors by stipulating that the bonds
can be put back to the issuer in the event the ma-jority
shareholder sells down his stake or when certain financial
ratios, eg. debt to e-quity ratio, breach a set level.
Bonds can also be exciting with scope for capital
appreciation. Take for instance a fall in interest rates,
in this case bonds which were issued when interest rates
were high will become increasingly valuable and as the bond
price rises, this provides profit for bond sellers.
Investors can also ''stock pick'' as they do in the
equity market. Bonds do get mis-priced and investors who
can pick this up can gain substantially. When sentiment
towards Asia was at its low last year, the Petronas 2006 US$
bond was trading at a huge spread of 1,200 basis points over
the equivalent U.S. treasury, and since then the spread has
narrowed as fears over a possi-bility that the Malaysian
government would default on its external liabilities
subsided. For the investors who had bought the bond, the
capital gain would have been quite significant.
(The writer is Investment Manager of Aberdeen Asset
Management. This column has the support of Investment
Management Association of Singapore and the Stock Exchange
of Singapore. )
