Basic Knowledge

HK Shares & Warrants

HK Shares & Warrants

What is stock borrowing and lending?

Stock borrowing and lending (SBL) is an effective mechanism by which dormant securities in an investor's portfolio can be utilized by another investor to create profits, especially in a volatile market.  Stock lending can be defined as a collateralised loan of securities transferred from a lender to a borrower for a limited period of time.  The borrower then agrees to return identical securities to the lender in due course.  However, the lender retains the benefits of ownership except voting rights. The borrower is entitled to utilize the securities as required, but is liable to the lender for benefits such as dividends, interest, bonus or rights issues.

Last Update: 2022-01-07

Is short-selling legal in Hong Kong?

Yes. According to the Securities and Futures Ordinance, investors are required to have the unconditional right of a presently exercisable stock in order to participate in short-selling. Simply by opening a SBL account, these requirements can easily be fulfilled.  Catering to your investment needs, there is no limitation on the size for short-selling at EBSI. We can lend you as little as one lot of stock.

Last Update: 2022-01-07

Are all listed stocks eligible for short-selling?

Investors only can short-sell the stocks within the 'Designated Securities Eligible for Short-Selling' prepared by HKEx. HKEx will revise the number of Designated Securities for short-selling on quarterly basis based on their selection criteria. Please visit HKEx for more details.

Last Update: 2022-01-07


Will an insurance company pay out the death benefit if the insured dies from committing suicide?

Life insurance policies usually have a suicide clause which defines the contestable period if the insured commits suicide. It usually counts from the policy effective date. If the suicide is committed beyond the contestable period, the insurance company is required to pay out the death benefit.

Last Update: 2022-01-07

Can the beneficiary file a death claim to the insurance company if the insured has been missing for several years?

According to the Common Law, a person will be presumed dead if they have been missing for 7 years, and their relatives cannot establish contact. As a result, the beneficiary can file a claim to the insurance company under such situation.

Last Update: 2022-01-07

What is a rider in life insurance? What is it used for?

A rider is a supplementary contract attached to the basic life insurance policy. The purpose of purchasing a rider is to increase the protection amount and coverage. A rider cannot be purchased individually and it must be attached to a basic policy. If the basic policy expires, the rider will also be terminated.

Last Update: 2022-01-07

Can an agent return part or all of the commission to customers as a privilege to them?

No. According to The Code of Practice published by The Hong Kong Federation of Insurers, an agent cannot offer to provide any rebate of the premium as an inducement to any prospective insurance policyholder.

Last Update: 2022-01-07

What is the suitable age for purchasing an insurance plan for a child for their future education fund?

Generally speaking, it is better to buy child education insurance at an early stage. There are three reasons for this: 1) the health condition of a child is better when they are younger; 2) greater savings for future education use result if insurance is purchased earlier; 3) there is an age limit for this kind of insurance plan. The insurance company may not accept the application if the insured is beyond the age limit.

Last Update: 2022-01-07

Is a medical examination required when purchasing medical insurance? Is it necessary to report health conditions and my medical history to the insurance company?

A medical examination is not a must when purchasing medical insurance which is subject to the requirement of insurance company. Age, health condition and the sum assured amount are the considerations for the insurance company when deciding whether a medical examination is required. The insured has to declare their health condition and medical history in the application and has to sign as confirmation. Otherwise, the insurance company may claim misrepresentation and non-disclosure to void the policy.

Last Update: 2022-01-07

Can the insured cancel a policy? If so, will the premium be refunded?

Although the policyholder has the right to cancel a policy, the insurance company does not. The insurance company is not responsible for refunding the premium if the policy is cancelled by the policyholder. If the policy has accumulated cash value, the policyholder can base on the provision of a non-forfeiture option and ask the insurance company to return the cash value. However, if there is no cash value accumulated upon cancellation of the policy, the policyholder may not receive a refund from the insurance company. For participating plans, if the annual dividends have been accumulated before the policy cancellation, the insurance company has to pay all the dividends to the insured.

Last Update: 2022-01-07

Can a minor purchase a life insurance plan?

According to Hong Kong law, a person below age 21 is classified as a minor. A minor can buy life insurance but they  need to appoint a trustee who is usually the parents or the guardians.

Last Update: 2022-01-07

Before emigrating to another country, I have added an accident rider to my life insurance policy which has been in place for a long time. Can I get indemnity if I have an accident in another country?

There is no geographical limit for the coverage of an insurance policy. Therefore, the insured can still enjoy insurance protection by paying the premium continuously after emigration. As claim applications have to be handled by the office where the policy is issued, you should submit your claim applications to the Hong Kong office since you purchased your insurance in Hong Kong.

Please note that the insurance company may take more time to check the documents and information provided by the insured for claims applications as the accident did not happen in Hong Kong.

Last Update: 2022-01-07

What are the questions I need to ask when replacing an existing policy?

Carefully consider the potential drawbacks of replacing an existing policy, particularly when it involves a lifetime protection.

  • Will the new policy provide you with the same level of returns and guarantee values as the existing policy?
  • Will you receive continuous coverage from the new policy?
  • Will the replacement incur extra charges?
  • Will the new policy require an extra medical examination or an increase in premiums?

Last Update: 2022-01-07

How do I lodge a claim?

When the need for a claim arises, first notify your insurance consultant or the insurance company. They will provide you with information on claim procedures. The claimant will be asked to submit relevant evidence to support their claim.

Last Update: 2022-01-07

What should I do after I have received an insurance policy?

  • Read the policy carefully and raise any queries to your insurance consultant.
  • Let the beneficiary know that they are insured and where the insurance policy is kept.
  • Keep the insurance policy document in a safe place. In case a claim arises, you are requested to submit the policy document to the insurance company for claims.

Last Update: 2022-01-07

What should I do if I lose my insurance policy document?

Inform your investment consultant or directly report to the insurance company immediately.

Last Update: 2022-01-07

What should I do if I am going to reside outside Hong Kong?

Most of the insurance policies provide worldwide coverage. To confirm, check with your insurance consultant or insurance company. If worldwide coverage is provided, you need to inform the insurance company of your new address so that all correspondence can be redirected to you.

Last Update: 2022-01-07

Mutual Funds

What kind of protection will I receive as a mutual fund investor?

When you invest in a unit trust, your investments are held within a trust structure, separate from the fund manager's assets. The trust's dealings are supervised by an independent trustee and the general supervision of the Hong Kong Securities and Futures Commission, thus offering you asset safety and peace of mind.

Last Update: 2022-01-07

What should I consider when buying unit trusts?

When making a decision on what unit trust to buy, you can consider the following:
Your personal situation
  • Your investment goal
  • Your investment horizon
  • Your risk tolerance
  • The fund manager
  • Its reputation
  • Total funds under management
  • Investment process and infrastructure
  • After sales service
  • The fund
  • Historical track record - consistency and absolute results
  • Fund manager's expertise and experience with this fund
  • Whether it suits your personal situation
  • Last Update: 2022-01-07

    How are unit trust prices calculated?

    Normally, a unit trust would either quote in NAV or bid/offer:

    • Net asset value = total value of underlying investments less all expenses including management fees
    • Offer price
      (price at which you buy) = (Net asset value/no. of units) + front-end fee
    • Bid price
      (price at which you sell) = (Net asset value/no. of units) - redemption fee, if applicable

    Last Update: 2022-01-07

    HK Shares IPO

    What is IPO?

    IPO refers to the first public distribution of stocks from a company that have not been publicly traded before.

    Last Update: 2022-01-07

    Why do companies go public?

    Enterprises can raise new capital for expansion through IPO. It can also raise the publicity of enterprises.

    Last Update: 2022-01-07

    How do companies go public?

    The Listing Committee of the Stock Exchange of Hong Kong (SEHK) must approve all proposed listing before it could go public. Two essential parties for a listing are sponsors and underwriters. Sponsors are responsible for handling the application procedures and mainly deal with SEHK. Except for some special cases, most of the issuers in an IPO would need underwriters to buy all shares not subscribed by the public.

    Last Update: 2022-01-07

    How do I get started buying IPO?

    You should fill in the application forms that are available in the places specified.

    Last Update: 2022-01-07

    How do I know which IPOs are available and when?

    According to listing rule of SEHK, all enterprises must broadcast to the public for their proposed listing. While main board issuers need to announce in both an English and a Chinese newspaper, GEM board issuers can announce via the Web page owned by GEM Board of SEHK.

    Last Update: 2022-01-07

    How do individual investors get IPO shares?

    Such information is given in each IPO's application form and prospectus.

    Last Update: 2022-01-07

    What is the method of IPO payment?

    Payment methods for IPO and e-IPO are specified in the application forms.

    Last Update: 2022-01-07

    How do I get the results of subscription?

    For those clients who have applied the IPOs in their own name, subscription results can usually be found in newspapers. If the IPO subscription is applied through us, you can check your allotment result by viewing your trading account on or after the allotment date.

    Last Update: 2022-01-07

    How to evaluate IPO shares?

    You can compare the prospects and multiples like P/E ratio of peers in the same industry.

    Last Update: 2022-01-07

    What are the primary and secondary markets?

    The primary market is the market in which newly issued securities are offered for sale. The secondary market is the market where existing securities are traded between investors.

    Last Update: 2022-01-07

    What is meant by primary and secondary offerings?

    A primary offering refers to an IPO. A secondary offering refers to the public distribution of stocks from a company whose shares have already been listed.

    Last Update: 2022-01-07

    What is book building?

    Book building is a process which usually occurs in placing. All underwriters submit the number of shares and respective prices that they are willing to underwrite.

    Last Update: 2022-01-07

    What is a syndicate?

    A syndicate refers to the underwriters who participate in the same IPO.

    Last Update: 2022-01-07

    What is a prospectus?

    A prospectus is a document showing the formation of and intent to issue shares. It is a legal document stating the purpose of the securities issue, describing in detail the primary business of the issuer, the issuer's financial condition and all matters as well as requirements relating to the IPO.

    Last Update: 2022-01-07

    What is a 'Red Herring'?

    A 'Red Herring' is a customary statement, printed in red, on the first page of a prospectus. It is not an offer to sell, but contains the required public disclosures. It is also called the preliminary prospectus. The notice is printed in red on the first page of the preliminary prospectus and on the face of the preliminary offering circular.

    Last Update: 2022-01-07

    What are underwriters?

    Underwriters are those who undertake to buy all remaining shares of an issuer when the IPO is not fully subscribed by the public.

    Last Update: 2022-01-07

    What is a 'cooling-off' period?

    A 'cooling-off' period, which is also known as a 'black-out period', refers to the period during which no brokers can issue research reports on the proposed listing enterprise.

    Last Update: 2022-01-07

    What do new issue and additional issue refer to?

    A new issue is the issuance of new shares at the offer price in an IPO. An additional issue is the issuance in addition to the original proposed shares, which often occurs when there is over-allotment.

    Last Update: 2022-01-07

    Is there more than one type of offering?

    There are many types of offering including public offer, placing, introduction and so forth.

    Last Update: 2022-01-07

    What is the public offering price?

    The public offering price is the price per offer share, exclusive of brokerage cost, the SEHK trading fee and the SFC transaction levy at which the offer shares are to be offered pursuant to the share offer.

    Last Update: 2022-01-07

    Stock Options

    What is a stock option?

    A stock option is a contract entered into between two parties, a buyer and a seller. The buyer has the right, but not the obligation, to trade an underlying asset with the seller at a predetermined price, within a certain time.

    There are two types of options: a call and a put. The last trade day will be one business day before the final trade day of the contract month. This American-type option can be exercised on or before the expiry date and settled in physical scrip.

    *An American-style option can be exercised at any time from its issuance up to its expiration.

    Last Update: 2022-01-07

    What is a call option?

    The buyer pays a premium to buy a call option contract, which gives the buyer the right to buy a specific amount of the underlying shares, on or before a future date (expiry date), at an exercise price (strike).

    Last Update: 2022-01-07

    What is a put option?

    The buyer pays a premium to buy a put option contract, which gives the buyer the right to sell a specific amount of the underlying shares, on or before a future date (expiry date), at an exercise price (strike).

    Last Update: 2022-01-07

    What is a strike price?

    The strike price, also known as the exercise price, is the price at which the option buyer and seller agree to trade the underlying stock, if the option is exercised.

    A call option whose strike price is below the market price of the underlying stock is in-the-money. Such an option allows the call holder to buy the shares for less than the current market price. A call whose strike price is above the underlying market price is out-of-the-money. Conversely, a put whose strike price is above the underlying price is in-the-money. This means the put holder can sell the asset for more than the current market price. A put whose strike price is below the underlying price is out-of-the-money.

    It can be seen from this that only in-the-money options would generally be exercised by their holders because otherwise the holders can buy or sell directly in the market at a better price. If an options strike price equals the price of its underlying asset, the option is said to be at-the-money (sometimes this term is applied to options whose strike price is very close to the underlying market price but not exactly equal).

    Last Update: 2022-01-07

    What is the exercise period (expiry date)?

    Stock options have an exercise period which limits their validity. After the expiry day of that exercise period, the option can no longer be traded or exercised.

    Last Update: 2022-01-07

    What is a premium?

    The price at which an option trades is generally called the 'premium', which is the amount of funds that an option buyer pays to the option seller.

    The premium is determined by market forces.

    Last Update: 2022-01-07

    What is a margin?

    The option sellers are required to deposit a margin, to anticipate daily price risk to cover market price fluctuations.

    Last Update: 2022-01-07

    How can I obtain more information about investing in stock options?

    You can read the Options Reference Educator and Frequently Asked Questions about stock options provided by HKEx.

    Last Update: 2022-01-07


    What are the advantages of trading HSI futures and options contracts?

    Proven markets
    Hang Seng Index futures and options allow experienced and novice investors alike to participate in the performance of the constituent stocks in the index. As both local and international investors regard the Hang Seng Index as a tested benchmark for the Hong Kong equity market and a yardstick of portfolio performance, these contracts are consistently used by investors for trading and risk management purposes.
    Cost effective
    Hang Seng Index futures and options enable hedging activities to be carried out in a more cost-effective way as they are traded on a margin basis. The margin to carry an open position is only a fraction of the contract value.
    Low transaction costs
    As the total value of high-capitalisation stocks represented in each Hang Seng Index futures and option contract is substantial and only one commission is charged to establish or liquidate a contract, transaction costs are low when compared with purchasing or selling the constituent stocks.

    Last Update: 2022-01-07

    What are the commonly used market terms that relate to stock index futures and options trading?

    Discount - The amount by which the price of a stock index futures contract is quoted below the cash market price.

    Expiry Day - The business day immediately preceding the last business day of the contract month.

    Hedging - Transferring the risk of loss due to adverse price movements through the purchase or sale of contracts in the stock index futures market.

    Leverage - The essence of stock index futures trading. Controlling a large investment with a relatively small margin deposit.

    Premium - The amount by which the price of a stock index futures contract is quoted above the cash market price.

    Last Update: 2022-01-07

    What is a margin?

    In the futures markets, both buyers and sellers are required to deposit an initial margin, which usually amounts to the anticipated daily price risk to cover market price fluctuations. At the end of each trading day, investors' accounts are adjusted according to the value of each contract or marked to market. If the initial margin deposit falls below a stipulated level, namely the maintenance margin, after marking-to-market, a margin call is issued and the investor must deposit additional funds to restore the account to the initial margin level.

    Last Update: 2022-01-07

    What is an initial margin?

    This is the minimum amount of margin in a fund that a client must deposit prior to opening a position. The amount of initial margin is defined by the SPAN calculation from the HKEX or by our company.

    Last Update: 2022-01-07

    What is a maintenance margin?

    The maintenance margin is 80% of the initial margin.

    Last Update: 2022-01-07

    What is a margin call?

    If the total equity of your account falls below the maintenance margin level (which is 80% of the initial margin), the available balance in your portfolio will show a debit balance. A margin call to return the equity back to the initial margin level will be required. You are then required to deposit sufficient funds or liquidate your position to satisfy the margin call.

    Last Update: 2022-01-07

    What is a maturity date?

    A maturity date is the date on which a futures contract must be fulfilled.

    Last Update: 2022-01-07

    Unit Linked Products

    Is the return on an investment-linked plan guaranteed?

    No, the return on an investment-linked plan is not guaranteed. This is because the price of the units that you hold may rise or fall depending on the market value of the investment.

    Last Update: 2022-01-07

    Do I have to surrender my investment-linked plan if I decide to change the investment fund?

    No, you can switch funds anytime and most investment-linked insurance plans waive this charge. However, some of the plans do have a limited number of free fund switches allowed each year, but subsequent switches will be subject to charges.

    Last Update: 2022-01-07

    Can I increase my investment?

    Yes, you are allowed to top up your existing investment-linked insurance plan at any time. The top-ups are normally used to enhance the investment portion of both single and regular-premium plans without any change in the insurance coverage. You can also increase the coverage of other insurance riders.

    Last Update: 2022-01-07

    How long should I hold onto my investment-linked insurance plan?

    There is no fixed period of time for you to hold onto your investment-linked insurance plan, but you would pre-define the term according to your investment/saving objective.

    Last Update: 2022-01-07

    Is the full amount of the premium used to purchase units?

    The full amount of the premium paid may not always be allocated to purchase units. Before buying an investment-linked plan, it is important to find out what percentage of your premium would be used to purchase units. This information, commonly known as the allocation rate, is available in the product brochure and/or policy contract.

    Last Update: 2022-01-07

    How do I know if a fund is performing well?

    You can monitor the investment performance of investment-linked funds by checking the unit prices through your regular plan statement. You can also check your plan performance with your dedicated financial adviser at any time.

    Last Update: 2022-01-07

    What if I change my mind after purchasing an investment-linked plan?

    As with all life insurance policies, after purchasing an investment-linked plan you will have a cooling off period to review your plan. If you decide that the plan is not suitable for your needs, you can cancel it. The insurer will refund all of the premiums that you have paid within the cooling off period (with adjustments for any changes in the market value of the investments).

    Last Update: 2022-01-07

    B Shares

    What are China B-shares?

    China B-shares are basically stocks of enterprises that are registered in the PRC and listed on either the Shanghai or Shenzhen Stock Exchanges in specific foreign currencies.

    The currency used in Shanghai B-shares is USD and the currency used in Shenzhen is HKD.

    Last Update: 2022-01-07

    What are the differences between China B-shares, A-shares and H-shares?

    Originally, B-shares listed enterprises were companies which required foreign currencies for their operations, and the B-shares market was only open to foreign individual or institutional investors. Since February 2001, the B-shares market has been open to mainland citizens who possess foreign currencies. B-shares have been redefined to be shares which are listed in China, but are traded in specific foreign currencies.

    The A-shares market is only open to mainland citizens and Qualified Foreign Institutional Investors (QFII), and the denominated currency is RMB.

    H-shares are stocks of enterprises that are registered in the PRC and also basically operate in the PRC, but are listed on the Hong Kong Stock Exchange.

    Some enterprises have issued more than one kind of the above-mentioned shares.

    Last Update: 2022-01-07

    What is a ST share?

    Enterprises which have recorded two consecutive fiscal losses. Their listed A / B shares are distinguished by the category ST (Special Treatment) shares. Their daily price fluctuation is limited to 5% of the closing price of the previous trading day.

    Last Update: 2022-01-07

    What is a PT share?

    For enterprises which have recorded three consecutive fiscal losses, their listed A / B shares have to be distinguished by the category PT (Particular Transfer) shares. The trading day for PT shares is only on Friday. Price fluctuations are restricted to an upper limit of 5% above the closing price of the previous trading day, but there is no lower limit.

    Last Update: 2022-01-07

    Structured Products

    What are structured notes?

    A structured note is a hybrid investment consisting of two major components. It is a derivative and a straight debt instrument (most are in the form of a tranche of European Medium Term Note Programme while others are in the form of a debt instrument issued by international financial institutions with strong credit standings). It can provide an investment return linked to the price performance of a myriad of possible indices, equities, rates or other underlying assets. Except for principal protected notes, at maturity, most structured notes may deliver the physical underlying asset to the investor.

    Before investing in structured notes, it is important to understand the risks associated with derivative instruments, and the impact of their performance under both positive or adverse market conditions.

    Last Update: 2022-01-07

    What are the factors that can affect the price of structured notes?

    The interest rate of a similar money market instrument and the premium of underwriting the risks of price volatilities in the market of the underlying asset.

    Last Update: 2022-01-07

    How many different types of structured notes are there?

    Based on the risk tolerance and the view of the price performance of the underlying asset, an investor can choose principal protected notes, 'Bull' ELNs and callable daily range accrual notes to meet their investment objectives, while matching their risk profile.

    Last Update: 2022-01-07

    What is the primary market for structured notes?

    Primary international financial institutions and investment banks that are active players in the markets issue structured notes. In the primary markets, structured notes are originated by these international financial institutions and offered to investors through the private banking firm and securities dealer distribution networks. Investors can tailor their own structure of notes to meet their investment objectives and match their risk profile. The minimum investment amount for structured notes in the primary markets is HK$1,000,000.

    Last Update: 2022-01-07

    What is the secondary market for structured notes?

    Most structured notes are traded in the secondary markets after they are successfully issued in the primary markets. There are hundreds of structured notes outstanding for investors to buy and sell in the secondary markets. In most circumstances, issuers will provide bid and offer prices in the secondary markets for notes issued by them. That means that investors can achieve better protection on their own investment in the case where a position must be liquidated when the market moves against them. The minimum investment amount for notes in the secondary markets is as little as HK$100,000.

    Last Update: 2022-01-07

    What are the features of trading structured notes?

    There is an abundant choice of underlying assets linked to structured notes. They may be linked to a group of mutual funds, hedge funds, interest rates, an equity index or group of indices, or a basket of selected stocks.

    They offer flexibility in the redemption period. If the value of the notes appreciated during the determined investment period, investors can redeem their note in the secondary market at any time to maximise profit. On the other hand, if the value of the notes differs from what the investors have anticipated, they can also redeem their note in order to minimise their loss.

    Last Update: 2022-01-07

    An example of trading a Bull ELN

    Mr. Chan takes a bullish view on a blue chip telecom stock in the short-term, and wants to invest in a related Bull ELN. Mr. Chan finally decides to invest a nominal HK$1,000,000 in the primary market with the following features:
    Linked stockA blue chip telecom stock
    Annualised yield21.02%
    Maturity48 days
    Spot price at tradingHK$11.30
    Strike priceHK$10.17 (90% of spot price)
    Note issuance price97.31% (i.e. actual settlement amount is HK$1,000,000 x 97.31% = HK$973,100
    Significant dates: 
    Trade date9-Aug
    Settlement date23-Aug
    Valuation date8-Oct
    Maturity date10-Oct
    Redemption scenarios at maturity:
    a. Stock price on valuation day >= strike price
    At the close of the stock market, if the stock trades above the strike price of HK$10.17, Mr. Chan will receive a return in cash equal to the denomination value HK$1,000,000 of the ELN. The return is HK$26,900 or 21.02% p.a. ([{HK$1,000,000-HK$973,100) / HK$973,100] x 365 / 48)

    b. Stock price on valuation day < strike price
    If the stock price drops below HK$10.17 on the close of trading on the valuation day, the issuer has the option to deliver Mr. Chan the 98,328 shares, equivalent to the denomination value calculated on the strike price. (HK$1,000,000 / HK$10.17 = 98,328 shares)

    The breakeven price, at which Mr. Chan is neither at gain nor loss if he sells the stocks, in scenario B, is HK$9.90 per share (HK$973,100 / 98,328 shares).

    Last Update: 2022-01-07


    What are bonds?

    A bond is a debt security. It is a loan agreement between a bond issuer (borrower) and bond investor (lender). When you purchase a bond, you are lending money to a government, corporation, or other entities known as the issuer. In return for the loan, the issuer promises to pay you a specified interest rate during the life of the bond and the principal is returned to the bondholder upon maturity of the bond.

    Last Update: 2022-01-07

    What are the different types of bonds?

    There are two typical types of bonds categorised by an issuer:
    Government bond
    When a government needs to raise funds to finance its expenditure, funds can be borrowed from the market by issuing bonds such as Treasury bonds (US Government) and Exchange Fund Notes (HK Government).
    Corporate bond
    A corporate bond is a financial instrument issued by private and public corporations. Companies use the funds raised for various purposes including building facilities, purchasing equipment and expanding the business.

    You can find four typical types of bonds categorised by par interest rate:
    Fixed-rate bond
    A fixed-rate bond is issued with a specified coupon rate, which is mainly determined by market conditions at the time of the bond's primary offering. Once determined, it is set contractually for the life of the bond. The coupon rate multiplied by the bond principal provides the dollar amount of the coupon. Investors usually receive interest payments quarterly, semi annually and yearly, while investors receive the face value of the bond upon maturity.
    Zero-coupon bond
    A zero-coupon bond is issued with no periodic interest at all, but the bonds are issued at a discount of par value. As the market value approaches the par value over time, investors will earn the differential value.
    Floating-rate bond
    A floating-rate bond is issued with a variable interest rate. Interest adjustments are made periodically during the life of the bond. In general, the coupon rate is tied to a money market index like Treasury bills. This instrument provides protection to the bondholder against interest rate rises. The yield of a floating-rate bond is always lower than those of fixed-rate bonds with the same maturity.
    Convertible bond
    A convertible bond is a type of corporate bond which allows a bondholder to convert the bond into common stock of the bond issuer. In other words, it is a structured product, linking a bond with a call option. Therefore, bondholders have the right to convert their bond to common stock under the predetermined number of shares (conversion ratio) and price (conversion price).

    Two typical types of features are:
    Call features
    Call features allow an issuer to re-purchase the bond at a specified call price before the bond expires. When the market interest rate is decreasing, the issuer of a corporate bond with a high coupon rate is likely to retire the high coupon debt and issue a new one at a lower coupon rate to reduce interest payments. Some bonds have 'call protection', which guarantees the bond is non-callable for a specified period before their call date.
    Put features
    Put features allow the bondholder to redeem the bond from the issuer at a designated price and time. The bondholder will do this only if the money can be reinvested elsewhere at a higher rate of return.

    Last Update: 2022-01-07

    How is the price of a bond calculated?

    The basic value of a bond price is an application of the discounted cash flow techniques. The price of a bond equals  the present value of all future cash flow, including expected coupon (C) (interest income) and the final redemption amount (F) by the discount factor. The discount rate used is the yield to maturity (YTM) which is simply the geometric average of the one-year forward rate for the life of the bond.
    If the YTM is not known, but the market price is available, the calculation can proceed in reverse.
    Bond price= 
    Issuer ABC Limited
    Coupon 7%
    Coupon frequency (per year) 1 (annual)
    Rating A3
    Issue date Jun 1, 2007
    Maturity date Jun 1, 2012
    Currency HKD
    Redemption amount 100%
    The expected yield to maturity (discount factor) is 8% per annum.
    The yield of a five year Exchange Fund Note is 5% per annum.
    What is the price of the above bond if you buy it at the new issue for HK$1,000,000?
    Bond price=
     DateCash received Cash flow (present value)
    1st coupon date6/1/2008US$7,000.00 US$6,481.48
    2nd coupon date6/1/2009US$7,000.00 US$6,001.37
    3rd coupon date6/1/2010US$7,000.00 US$5,556.83
    4th coupon date6/1/2011US$7,000.00 US$5,145.21
    5th coupon date and final redemption date6/1/2012US$107,000.00 US$72,822.40
     Total:US$135,000.00 US$96,007.29
    If the coupon rate = yield to maturity (discount factor), the bond will be priced at par.
    If the expected yield to maturity goes up or down, what will happen to the bond price?
    If the yield to maturity goes up, the price of the bond will go down. When the yield to maturity is 8%, which is higher than the coupon rate (7%), the bond will be priced at discount. When the yield to maturity goes down (drops to 6%), which is lower than the coupon rate (7%), the bond price will then be priced at a premium.
    The calculation is shown as follows:
    Bond price=
    Bond price=
    The bond prices shown in the financial pages are not the price that investors pay for the bond. This is because the price does not include the interest accrued between the coupon payment dates.
    If 50 days have passed since the last coupon payment, and there are 365 days in the coupon period, the bond seller is entitled to a payment of accrued interest of 50/365. Referring to the above example, if the coupon is 7% per annum, the accrued interest will be US$7000 x 50/365 = US$958.90

    Last Update: 2022-01-07

    What is bond indenture?

    This is a contract binding the bondholders and bond issuers into the bond issue for a specified term. Generally, the document provides the following information:

    • Description of the bond
    • Terms and conditions of the bond
    • Business overview of the issuer
    • Financials of the issuer
    • Use of proceeds

    • Investors are recommended to pay attention to the above information. Key parts of the notes have been stated in this document. Also, in the case of a credit event, the arrangement will be followed according to the bond indenture.

    Last Update: 2022-01-07

    What is the yield curve?

    The yield curve is the graph showing the term structure of interest rates. Yields on bonds with different maturities but with the same qualities are plotted. If short-term interest rates are lower than long-term rates, it is called a Positive Yield Curve. If short-term rates are higher than long-term interest rates, it is called an Inverted (or Negative) Yield Curve. If there is little difference between short-term and long-term interest rates, it is called a Flat Yield Curve.

  • When the economy shows a Positive Yield Curve, this means that buying bonds with longer maturities can enjoy higher returns than a short-dated one.
  • When the economy shows an Inverted Yield Curve, the market expects long-term interest rates to decline. Investors can purchase short-dated bonds to replace the long-dated issues and it may imply a recession is coming.
  • When the economy shows a Flat Yield Curve, this means that the reward on extending maturities is relatively small. Investors will choose to stay in the short-dated end of the maturity range.
  • Last Update: 2022-01-07

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