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What Is A Bond?

What Is A Bond?
June 20
11:00 2017

In recent days, there had been talks about the Fijian Government raising $13 million in a reopening of a ten-year bond, the first Bond Reopening Facility in the country’s history.

Amid strong investor optimism, $15 million was received in tenders after the Fijian Government floated $10 million in reopened bonds. Of the $15 million received, $13 million was accepted with a coupon rate of 6.00 per cent per annum.

 

So what is a bond?

A bond is a fixed income security where the borrower agrees to pay a fixed rate of interest called Coupon periodically until the term of the loan.

The principal amount is paid on the last coupon date called maturity date.  The interest or coupon is normally paid semi-annually.

In Fiji, apart from the Government, statutory corporations such as Fiji Electricity Authority, Fiji Development Bank and the Housing Authority also issue borrow by issuing bonds.

A bond differs from a loan where the principal amount is paid on the end of the loan or maturity date while for a loan, the borrower pays both the interest and principal regularly over the life of the loan.

 

What does the reopening mean?

Reopening of Bonds is the issuance of an additional amount of a previously issued bond. Reopened bonds have the same maturity date and interest rate as the original bonds, but they are sold on different dates and usually at a different price.

For example, a 10 year bond was first on issued on 1 June 2017 with a coupon rate of 5 per cent.  Its maturity date is 1 June 2027.

If the same bond is re-opened on 1 July 2017, its maturity date remain as 1 June 2027 and its coupon rate is the same 5 per cent.

However, the term of the bond is no longer 10 years but is less by 1 month as it was issued on 1 July 2017

The Fijian Government currently has a bond portfolio that is held in small sized lots – this means it is limited to a small number of investors.

By reopening these bonds at set benchmarks of maturity, Government can create larger stocks of bonds and it is these larger stocks of bonds that attract a greater number of investors, giving more investors a stake in the Fijian economy.

More investors are more willing to pay premiums for more liquid markets and that would lead to lower borrowing costs for Government and this means lower burdens on Fijian taxpayers.

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