In Blog #4, I gave examples of high-yield savings accounts which can make your savings work harder. Some require you to do multiple transactions with the bank. Others have minimum balance requirements. All have variable interest rates that can be changed at the bank’s fancy.
Wouldn’t it be to great if there is savings account that guarantees fixed interest rates for a long period? One product that does is Singapore Savings Bonds (SSB), which is my subject for today.
Bonds can be confusing, even intimidating to newbie investors. For starters, most investors don’t want to lend money to issuers that are financially shaky unless the returns are great and one can afford to lose a chunk of money.
Even if your bond has very little default risk, there is still the uncertainty of whether you can make a profit by selling it before its maturity date. This risk is appropriately called price risk. You need to have a degree in finance or economics to understand what affect bond prices (the short answer is “many” – things like inflation, central bank actions, outlook on the economy, blah blah blah).
What is interesting about SSBs is that they have negligible default risk and zero price risk. Why? Well, SSBs are bonds issued by the Singapore Government which has a consistent record of a AAA credit rating according to global bond rating agencies. AAA-rated bonds have very low default risks. As for price risk, SSBs are not traded in a secondary market like after issuance. No trades means no market prices which in turn means no price risk.
Here are the key features of SSBs:
a. All SSBs are issued with a 10-year maturity.
b. Each SSB has a schedule of interest rate for each year of the bond.
c. These interest rates are fixed for any particular issue (though they can be different for bonds issued at different times).
c. Interest is paid every 6 months after the bond is issued.
d. SSB interest is exempt from income tax
e. SSBs can be redeemed for the full amount invested anytime after purchase with no
loss of capital.
Who should buy SSBs?
- Investors who desire a default-free investment.
- Investors who want to lock into fixed rates over a long period.
- Investors who don’t want exposure to price risk
How to Buy and Sell SSBs?
- Buying and redeeming SSBs is done through ATM, Internet banking or mobile app of DBS/POSB, OCBC or UOB. Note that SSBs cannot be transacted over bank counters.
- You need to have an individual CDP Securities account linked to any of the above bank account’s for debits and credit of principal and interest payments. Visit CDP’s website for information on opening a CDP Securities account.
- Investment sums must be in multiples of $500, up to $50,000 for one bond. Your
maximum SBS investment is capped at $100,000.
- Bonds are issued monthly.
- There is a $2 non-refundable transaction fee for each application and redemption request.
- There are no penalty fees for redemption.
- For more information on SSBs including the issue calendar, visit the SSG website.