Temasek Holdings has issued 20 and 30 year bonds paying a coupon rate of 4% and 4.2% respectively. Based on the issue price (which is slightly below par), the bonds offer a slightly higher yield of 4.149% and 4.37% respectively.
Temasek Holdings has a AAA rating from S&P and Aaa rating from Moody's. These are the highest rating available for bonds. The credit risk is as low as government bonds.
However, there is the risk of a change in interest rate. If a 20 year bond yields 4% and the interest rate for this duration increases to 5%, the prices of the bonds will drop by 8.4% If the interest rate increases to 7% (due to high inflation), the price of the bonds will drop by 28%. When you invest in a long term bond, your return is locked up for this period. You only suffer a capital risk if you decide to sell off the bonds prematurely on the market.
The bonds will refund the principal in full at the maturity date, i.e. the end of the period.
For retirees who wish to have an regular income of a higher yield over 20 and 30 years, this is a good choice. Many insurance companies invest in these type of bonds, but they take away 2% from their policyholders, giving a net yield that is much lower. It is better for the retiree to invest directly in these bonds.
I have asked my bank and stockbroker to tell me how these bonds can be purchased. I will post the findings later.
Tan Kin Lian
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