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 Basic Bond & Bond buying 101, Let's share our knowledge

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TOS
post Sep 4 2020, 03:16 PM

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QUOTE(hksgmy @ Sep 3 2020, 09:34 PM)
Take away the cost of houses and cars (all paid up), inflation in Singapore is quite well controlled - for political reasons: thankfully the cost of chicken rice can still be only $2.50 at some stalls.
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I know, but the 2.50 SGD chicken rice has very little chicken only. You won't be full, really. I tried once, close to Tampines Interchange. Rice and chicken so little. 3-4 dollars a plate will be a better one. tongue.gif

The actual inflation in SG is around 3-4%, based on my own "real life" calculation, Ramjade got a lower number at around 2%.

But good write-up on the bond article. Hope they will promote retail bonds soon so that the layman can have access to such vehicles.
Ramjade
post Sep 4 2020, 03:23 PM

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QUOTE(TOS @ Sep 4 2020, 03:16 PM)
I know, but the 2.50 SGD chicken rice has very little chicken only. You won't be full, really. I tried once, close to Tampines Interchange. Rice and chicken so little. 3-4 dollars a plate will be a better one. tongue.gif

The actual inflation in SG is around 3-4%, based on my own "real life" calculation, Ramjade got a lower number at around 2%.

But good write-up on the bond article. Hope they will promote retail bonds soon so that the layman can have access to such vehicles.
*
Go woodlands or toa payoh and eat at their hawker place. Anyway Singapore is a freaking expensive place to live. The cheapest in Malaysia I think is taiping. Anyway OT.

This post has been edited by Ramjade: Sep 4 2020, 03:24 PM
prophetjul
post Sep 4 2020, 04:37 PM

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QUOTE(Ramjade @ Sep 4 2020, 11:19 AM)
Your expertise is needed
prophetjul, guy3288
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No expert in bonds. biggrin.gif
TShksgmy
post Sep 5 2020, 02:06 AM

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QUOTE(mmweric @ Sep 4 2020, 10:59 AM)
Would like to add a bit.  I am currently 46 and retired early at 42.  I have owned direct bonds before but currently have moved to bond funds. 

In my personal opinion what asset classes you have in your investment portfolio depends on your cashflow requirements, risk capacity and risk tolerance. 

Bonds are bought for fixed income, high liquidity and low risk to capital (that is if you buy portfolio of investment grade bonds ).

If you're young and have a steady job it might make more sense to have a higher percentage of your investments in more high risk assets like equity as you have steady income and lots of time to accumulate more wealth and higher capacity to recover from a huge lost.

If you are older and retired bonds it make more sense to allocate a bit to bonds as you are no longer in the accumulation phase you can't take a big loss and have no more income.

For me I keep my spare cash basically 1.5 years spending in a bond fund.  And 6 months in FD giving me a 2 year buffer.

In Malaysia bond ratings are down by either MARC or RAM.  I wouldn't buy any bonds which are unrated or perpetual as the risk is too high for me.  Having a ladder of diredt bonds is a great way to have a secured income but not really practical in Malaysia.

It is almost impossible to buy 5 to 6 direct investment grade bonds with different maturities as the supply is quite limited hence I would feel buying a bond fund would be easier and more practical.  After bank charges for their markup etc it is not that cheap also.

One thing for us malaysians who were employed and are retiring we don't really have to keep that much in bonds as we have a huge chunk of money in our epf which has a guaranteed return of 2.5% and a rolling target of 3.5% above inflation which is better then any bond so it would be better to just leave your money in epf acting as some sort of bond allocation in your portfolio.
*
To a certain extent, based on what you’ve just shared, the bond market in Singapore is a lot more developed than that of Malaysia’s. I can still get (and I do possess) a few investment grade perpetual bonds - mainly issued by our local banks - and I bought them in multiples. This is as close to sovereign rating bonds as I can imagine possessing, and these bonds will generate positive income on a regular basis. OCBC, UOB and DBS have perpetuals that proved extremely popular and bloody resistant to price drops, even during the mess that was the early days of COVID-19.

My only concern is that the banks will exercise their call dates instead of refixing the coupon extending the validity of the bond (which is the opposite of what most buyers usually want, but all I’m interested is in a steady passive income stream).

But, generally, I agree with you - I wouldn’t touch junk bonds with a ten foot pole. I did try one, offered by Midas Engineering, which paid 6.5% some years ago, and I remembered 2 things from that experiment: I ended up flipping through the pages of the Straits Times Business for updates on their China railways tender more often than I would like (they were successful in obtaining the tender award) and I never felt more relief than I did when they redeemed their bond in full at the end of the maturity date.

Never picked up a junk bond since!

This post has been edited by hksgmy: Sep 5 2020, 02:07 AM
pisces88
post Sep 5 2020, 02:51 AM

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Just curious, did u ever compare returns for bond vs bond fund, and what was the outcome? Wil a bond fund fair better in medium term, say 3-5 years?
TShksgmy
post Sep 5 2020, 04:29 AM

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Actually, to be honest, that has not occurred to me. Generally, I stay away from funds because I don’t have as much control over the type of bonds they pick. Usually a fund may try to balance out a raft of say AAA rated bonds with a bunch of lesser rated but still IG bonds and finish off with a (hopefully) pinch of junk bonds solely to chase a theoretical higher return - so, I can’t quite pick and day I only want the AAA rated ones.

In my age, because of the sheer volume of bonds I’ve purchased from the 3 outlets (UOB, Maybank and Kay Hean - the last one is a brokerage house), I’m happy to say the bankers/brokers there are happy to negotiate on the offer prices.

Let’s be fair, these guys need to make a living too - but, because they know I’ll be back and back and back, they’re willing to make less off me, sometimes by as much as 2 or 3¢ off the asking price, and multiply that by 250,000, it actually makes quite a difference.

This post has been edited by hksgmy: Sep 5 2020, 07:41 AM
mmweric
post Sep 5 2020, 06:17 AM

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QUOTE(hksgmy @ Sep 5 2020, 02:06 AM)
To a certain extent, based on what you’ve just shared, the bond market in Singapore is a lot more developed than that of Malaysia’s. I can still get (and I do possess) a few investment grade perpetual bonds - mainly issued by our local banks - and I bought them in multiples. This is as close to sovereign rating bonds as I can imagine possessing, and these bonds will generate positive income on a regular basis. OCBC, UOB and DBS have perpetuals that proved extremely popular and bloody resistant to price drops, even during the mess that was the early days of COVID-19.

My only concern is that the banks will exercise their call dates instead of refixing the coupon extending the validity of the bond (which is the opposite of what most buyers usually want, but all I’m interested is in a steady passive income stream).

But, generally, I agree with you - I wouldn’t touch junk bonds with a ten foot pole. I did try one, offered by Midas Engineering, which paid 6.5% some years ago, and I remembered 2 things from that experiment: I ended up flipping through the pages of the Straits Times Business for updates on their China railways tender more often than I would like (they were successful in obtaining the tender award) and I never felt more relief than I did when they redeemed their bond in full at the end of the maturity date.

Never picked up a junk bond since!
*
There are a lot more investment options and better banking services in Singapore that's why most rich people in Malaysia have their money in Singapore. smile.gif

Government Bonds and Investment Bonds denominated in local currency are a bit different compared to sovereign bonds. Singapore (same as Malaysia) has a fiat currency meaning it's currency is not tagged to gold so it is impossible to default as the government can just print more money. Companies can't so there is still a possibility of default (but unlikely for the banks in Singapore as I am sure the government would come to their rescue (like in 2008 in the US) as so many retirees money is tied to OCBC, UOB and DBS in Singapore).

Bond prices depend on the current interest rate, credit risk, it's term and its options like whether it is callable or convertible. It looks like the banking bonds you bought are perpetual and callable. Perpetual bonds give you a higher coupon rate compared to non perpetual as it is more sensitive to interest rate changes (the longer the term the more sensitive it is).

In my opinion you have to be careful with perpetual bonds as if interest rates rise you would have a capital loss and unlike a non-perpetual bond you can't hold it to maturity to get back the original amount. If you want a constant income in a more secure way using direct bonds it would be better to buy a ladder of bonds with different maturity dates for example 5 bonds with maturities of 1-5 years (you would have to most probably start with 3-8 years) and continue to buy a new bond eveytime one matures.

That would ensure even if there was an interest rate increase you wouldn't really be affected as you would still be able to hold the bond to maturity . It's not possible to have a ladder of bonds in Malaysia as a retail investor here we don't have access to many direct
bonds.
TShksgmy
post Sep 5 2020, 07:40 AM

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QUOTE(mmweric @ Sep 5 2020, 06:17 AM)
There are a lot more investment options and better banking services in Singapore that's why most rich people in Malaysia have their money in Singapore. smile.gif

Government Bonds and Investment Bonds denominated in local currency are a bit different compared to sovereign bonds.  Singapore (same as Malaysia) has a fiat currency meaning it's currency is not tagged to gold so it is impossible to default as the government can just print more money.  Companies can't so there is still a possibility of default (but unlikely for the banks in Singapore as I am sure the government would come to their rescue (like in 2008 in the US) as so many retirees money is tied to OCBC, UOB and DBS in Singapore). 

Bond prices depend on the current interest rate, credit risk, it's term and its options like whether it is callable or convertible.  It looks like the banking bonds you bought are perpetual and callable.  Perpetual bonds give you a higher coupon rate compared to non perpetual as it is more sensitive to interest rate changes (the longer the term the more sensitive it is).

In my opinion you have to be careful with perpetual bonds as if interest rates rise you would have a capital loss and unlike a non-perpetual bond you can't hold it to maturity to get back the original amount.  If you want a constant income in a more secure way using direct bonds it would be better to buy a ladder of bonds with different maturity dates for example 5 bonds with maturities of 1-5 years (you would have to most probably start with 3-8 years) and continue to buy a new bond eveytime one matures.

That would ensure even if there was an interest rate increase you wouldn't really be affected as you would still be able to hold the bond to maturity .  It's not possible to have a ladder of bonds in Malaysia as a retail investor here we don't have access to many direct
bonds.
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Yes, good point - but, these callable perpetuals have set dates not too far off in the future where either the refix is done, or where they can be redeemed. I would never buy perpetuals without the option of a refix or the possibly or the bonds being called, in fact, I’m pretty sure there are no such bonds in the market, at least not in Singapore.

My mention of sovereign ratings in the same sentence as OCBC, UOB and DBS is very much in line with what you said - these guys are simply too essential, too central to Singapore’s existence to be allowed to fail. And let’s face it, they are also quite prudently managed and if there’s one thing I can bet on, it is for the Singaporeans to be ultra conservative when it comes to risk taking.

Works well for me, because I’m ultra scared of risks too - especially at my age! Haha.
xuzen
post Sep 5 2020, 11:00 AM

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Friends,

Bonds return are usually in the region of 4 - 5% p.a., may go up to 8% if you trade it or go for speculative bonds.

Now, ask yourself, you as a bond holder will need to study the bond. You need to calculate its Macaulay Duration, its convexity, the Yield to Maturity etc. All these need effort and for what? For a 4-5% return?

It is just me, but I rather let the professional bond trader or bond fund manager manage my bond portfolio knowing that bond management charges are usually low anyway hence you don't overpay much.

With the time and effort saved, I rather use it to trade in stocks which has a larger quantum of gain potential. Minimum effort, maximum gain should be the way.

p/s my two cents worth.

Xuzen

This post has been edited by xuzen: Sep 5 2020, 11:01 AM
TShksgmy
post Sep 5 2020, 12:03 PM

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QUOTE(xuzen @ Sep 5 2020, 11:00 AM)
Friends,

Bonds return are usually in the region of 4 - 5% p.a., may go up to 8% if you trade it or go for speculative bonds.

Now, ask yourself, you as a bond holder will need to study the bond. You need to calculate its Macaulay Duration, its convexity, the Yield to Maturity etc. All these need effort and for what? For a 4-5% return?

It is just me, but I rather let the professional bond trader or bond fund manager manage my bond portfolio knowing that bond management charges are usually low anyway hence you don't overpay much.

With the time and effort saved, I rather use it to trade in stocks which has a larger quantum of gain potential. Minimum effort, maximum gain should be the way.

p/s my two cents worth.

Xuzen
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I think that's a fair comment! My purpose for posting this was also to learn and read about other people's perspective - and I'm glad to see that it's been a good mix of opinions so far. Thank you for chipping in!
vanitas
post Sep 5 2020, 12:18 PM

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Other than bond and bond fund that being discussed here, actually there is also a Malaysia government bond ETF.

Link: https://www.ambankgroup.com/sites/abfmy1/en...es/default.aspx
mmweric
post Sep 5 2020, 03:07 PM

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QUOTE(hksgmy @ Sep 5 2020, 07:40 AM)
Yes, good point - but, these callable perpetuals have set dates not too far off in the future where either the refix is done, or where they can be redeemed. I would never buy perpetuals without the option of a refix or the possibly or the bonds being called, in fact, I’m pretty sure there are no such bonds in the market, at least not in Singapore.

My mention of sovereign ratings in the same sentence as OCBC, UOB and DBS is very much in line with what you said - these guys are simply too essential, too central to Singapore’s existence to be allowed to fail. And let’s face it, they are also quite prudently managed and if there’s one thing I can bet on, it is for the Singaporeans to be ultra conservative when it comes to risk taking.

Works well for me, because I’m ultra scared of risks too - especially at my age! Haha.
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Perpetual bonds are bonds which are which can't be redeemed hence called perpetual bonds. Perpetual bonds are quite common they even sell Singapore perpetual bonds here in Malaysia. My banker has been trying to sell me some too.

https://www.moneysense.gov.sg/articles/2018...%20call%20dates.

Personally I would rather go through a bond fund as a good bond fund manager sometimes can make a few more points return through trading of bonds and besides that they also reduce risk through the diversification by owning a larger pool of bonds. Bonds are quite technical with a deterministic return not like equity which can be exploited by a good bond fund manager.

In Malaysia the investment grade bond funds I own has quite consistently performed better then investment grade bond returns for the last 10 years. I am sure there are similar bond funds in Singapore.

When you buy a bond fund you can check it's prospectus on what type of bonds they buy and whether they buy only local or overseas bonds. So you do have a bit of control over the types of bonds they have. Bond funds do of cause have an advantage of getting to purchase bonds at a significantly lower price then retail investors. The bond fund I own charges a 0.52% management fee with 0% sales charge. If a bond fund charges something like 1% management fees and you buy it from a bank which charges you another 1% sales charge then it might not be worth purchasing it.

But with the current drop in interest rates in the near to mid term direct bonds might start to make more sense as if bond yields drop to 1-2% the management fees of 0.52% might not be justifiable.
TShksgmy
post Sep 5 2020, 03:27 PM

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QUOTE(mmweric @ Sep 5 2020, 03:07 PM)
Perpetual bonds are bonds which are which can't be redeemed hence called perpetual bonds.  Perpetual bonds are quite common they even sell Singapore perpetual bonds here in Malaysia.  My banker has been trying to sell me some too.

https://www.moneysense.gov.sg/articles/2018...%20call%20dates.

Personally I would rather go through a bond fund as a good bond fund manager sometimes can make a few more points return through trading of bonds and besides that they also reduce risk through the diversification by owning a larger pool of bonds.  Bonds are quite technical with a deterministic return not like equity which can be exploited by a good bond fund manager. 

In Malaysia the investment grade bond funds I own has quite consistently performed better then investment grade bond returns for the last 10 years.  I am sure there are similar bond funds in Singapore. 

When you buy a bond fund you can check it's prospectus on what type of bonds they buy and whether they buy only local or overseas bonds.  So you do have a bit of control over the types of bonds they have.  Bond funds do of cause have an advantage of getting to purchase bonds at a significantly lower price then retail investors.  The bond fund I own charges a 0.52% management fee with 0% sales charge.  If a bond fund charges something like 1% management fees and you buy it from a bank which charges you another 1% sales charge then it might not be worth purchasing it.

But with the current drop in interest rates in the near to mid term direct bonds might start to make more sense as if bond yields drop to 1-2% the management fees of 0.52% might not be justifiable.
*
Thank you for raising some valid points. I do have to make a small clarification on the nature of perpetual bonds though - on the surface, these are bonds that don’t have a maturity date (hence their designation) but in practice, they always have a callable date in which the issuer can exercise to pay off the debt (what is termed yield to call, YTC as opposed to yield to maturity, YTM). None of my previous perpetual bonds have suffered a lapse in their callable dates.

This is important to the issuer’s reputation and also to its ability to raise future bond sales. Of course, in extenuating circumstances, the callable date may be delayed, but to let it lapse and enter a refixing is actually very rare in the context of IG bonds in Singapore.
guy3288
post Sep 5 2020, 03:45 PM

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QUOTE(Ramjade @ Sep 4 2020, 11:19 AM)
Your expertise is needed
prophetjul, guy3288
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Hello Ramjade,
how is your investment doing, sounds like you are making more than most of us here

i am no expert in financial as you know me in FSM i just hantam buy and see.

Anyway, bonds are just diversification from FD ASX, esp if you have too much there.

Not true to say gd bonds pay only 4-5%,
PBB (2009-2059) AA coupon 7.5%
OSK Medium Note 2010-2020 A2 7.25%
CIMB Tier 1 perpetual (2008-2039) AA 6.7%
say only Perpetual, tipu lah! all of them called back,
dont call back i am more happy.

Now lower CIMB perpertual 2016 5.5%
buy corporate then, unrated also take
Tropicana 7.0% Ecoworld 6.4 Mahsing 6+, Affin Single 5+%
No default so far, best part is buy below PAR and at maturity call back make another tidy sum
who say bonds not gd......maybe properties better, buy rent then sell.
Got a unit bought 48k 6 yrs ago now agent ask me wanna sell 205k nett

Ramjade
post Sep 5 2020, 03:56 PM

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QUOTE(guy3288 @ Sep 5 2020, 03:45 PM)
Hello Ramjade,
how is your investment doing, sounds like you are making more than most of us here

i am no expert in financial as you know me in FSM i just hantam buy and see.

Anyway, bonds are just diversification from FD ASX, esp if you have too much there.

Not true to say gd bonds pay only 4-5%, 
PBB (2009-2059)  AA coupon  7.5%
OSK Medium Note 2010-2020 A2 7.25%
CIMB Tier 1 perpetual (2008-2039) AA 6.7%
say only Perpetual, tipu lah! all of them called back,
dont call back i am more happy.

Now lower CIMB perpertual  2016  5.5%
buy corporate then, unrated also take
Tropicana 7.0% Ecoworld 6.4 Mahsing 6+, Affin Single 5+%
No default so far, best part is buy below PAR and at maturity call back make another tidy sum
who say bonds not gd......maybe properties better, buy rent then sell.
Got a unit bought 48k 6 yrs ago now agent ask me wanna sell 205k nett
*
I am doing great. My dividends are giving me 1/3 of my annual salary and it can but one free stock worth SGD4k every year.
No la. Making small money only.

This post has been edited by Ramjade: Sep 5 2020, 03:57 PM
TShksgmy
post Sep 5 2020, 04:09 PM

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QUOTE(Ramjade @ Sep 5 2020, 03:56 PM)
I am doing great. My dividends are giving me 1/3 of my annual salary and it can but one free stock worth SGD4k every year.
No la. Making small money only.
*
Wow! You guys are real gurus... I am humbled in your presence, and I thank you for contributing your invaluable opinions to this thread.
Boomwick
post Sep 5 2020, 05:16 PM

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QUOTE(Ramjade @ Sep 3 2020, 12:49 PM)
That's a reason why you don't see people talking much about bonds in Malaysia.

One bond cost RM250k/batch. How many can fork out RM250k? Same issue in sinagpore. One batch cost SGD250k That's why bond is off limit to Malaysian unless one is extremely rich.

I will never buy bonds even if I have the money cause bond coupon is stagnant so you will lose money to inflation.
I am dividend investing guy.
Better for me to buy Dividend growth stock as every year my dividends are increasing automatically which means for the same bond duration, I am actually earning more than bond coupons.
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U dun buy and prefer dividend stock doesnt mean other people dun buy..
Bond market capitalization is almost as big as the equity market, or even bigger.. i dun have data..

U prefer dividend stock, and dun want bond.. tats alright.. maybe u r not that level yet..

And dividend stock is still a stock tat goes up and down very quickly

Giv u an example.. dominan.. every quarter pay dividend.. 1 lock down.. price from rm 1.30 go to rm 0.7..

But if the same happen.. good rated bond will not drop from par value 100 to 50 over 1 week.. junk bond aside...
mmweric
post Sep 5 2020, 05:40 PM

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QUOTE(hksgmy @ Sep 5 2020, 03:27 PM)
Thank you for raising some valid points. I do have to make a small clarification on the nature of perpetual bonds though - on the surface, these are bonds that don’t have a maturity date (hence their designation) but in practice, they always have a callable date in which the issuer can exercise to pay off the debt (what is termed yield to call, YTC as opposed to yield to maturity, YTM). None of my previous perpetual bonds have suffered a lapse in their callable dates.

This is important to the issuer’s reputation and also to its ability to raise future bond sales. Of course, in extenuating circumstances, the callable date may be delayed, but to let it lapse and enter a refixing is actually very rare in the context of IG bonds in Singapore.
*
The reason why they are called perpetual is due to them not having a maturity date for the buyer. A bond can be perpetual or of fixed maturity with an option to be callable (convert to cash) or convertible (convertible to shares).

If interest rates fall the issuer would call it back as it would be cheaper to refinance the debt. The perpetuity part is more on perpetuity for the buyer if the issuer does not call it. If interest rates had gone up your bonds might not have been called and the bond price would go down so if you sell it at that time you would make a capital lost.

Interest rates fluctuate depending on a government's monetary policy if inflation suddenly went up and the singapore economy was overheating interest rates would go up. Same as if the economy was depressed and inflation was too low interest rates would drop.

Singapore interest rates can be viewed here.
https://tradingeconomics.com/singapore/interest-rate

An interesting fact is some of the oldest perpetual bonds are consols which was issued by the UK govt in 1751 originally at 3.5%. The government continued to pay interest on it till 2015 when they decided to redeem all of it (make a call). That is 264 years.

There are pro's and con's of buying perpetual bonds so whether perpetual bonds are right for you is of cause a personal decision and depends on your own personal financial situation

Pros
-----
1. Steady, predictable source of income with payments on a set schedule

2. Some perpetual bonds increase interest at predetermined points in the future

Cons
-----

1. Investors are subject to perpetual credit risk exposure

2. Issuers may be able to recall some perpetual bonds

3. Rising general interest rates could diminish the value of the perpetual bond

source: https://www.investopedia.com/articles/inves...ds-overview.asp

This post has been edited by mmweric: Sep 5 2020, 05:46 PM
Ramjade
post Sep 5 2020, 06:03 PM

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QUOTE(Boomwick @ Sep 5 2020, 05:16 PM)
U dun buy and prefer dividend stock doesnt mean other people dun buy..
Bond market capitalization is almost as big as the equity market, or even bigger.. i dun have data..

U prefer dividend stock, and dun want bond.. tats alright.. maybe u r not that level yet..

And dividend stock is still a stock tat goes up and down very quickly

Giv u an example.. dominan.. every quarter pay dividend.. 1 lock down.. price from rm 1.30 go to rm 0.7..

But if the same happen.. good rated bond will not drop from par value 100 to 50 over 1 week.. junk bond aside...
*
I don't buy Malaysian stocks. And as dividend investor I don't care about price. Who cares if it drop? The company is fine (you need to check before buying). I am not selling. I only care if I am selling at that time. What price drop? If a company that I am holding drop in price, just buy more.
Very good if drop. As a dividend investor I love it if the price drop.
So far my dividneds have held up very good. Even in this covid era.

Best part about dividend Investing, no one is going to come and ask you to sell your company an did you invest long term, a 4% yield stock can become 10%. Bonds are unable to do that.

This post has been edited by Ramjade: Sep 5 2020, 06:47 PM
hlyh1230
post Sep 5 2020, 10:46 PM

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anyone here purchases retail/wholesale bonds in FSM MY?
how's your result so far?

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