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Investing in complex bonds

Complex bonds mainly refer to bonds that provide a fixed interest rate. These are bonds with special features and conditions. These special bonds therefore have different risks than regular bonds.

Investing involves risk. You could lose all or part of your investment.

 

This concerns 3 types of special bonds: 

  • Convertible bonds
  • Perpetual bonds
  • Asset Backed Securities
Convertible bonds

Just as with a regular bond, a company can issue a convertible bond to raise money for new investments, for example. But with a convertible bond, you as bondholder have the right to convert the bond into a predetermined number of shares of that company at a predetermined price (the conversion price), within a predetermined period (the exercise period). This right is similar to the right of a call option. Because of this right, the coupon interest of a convertible bond is usually lower than the coupon interest of a comparable regular bond.

A convertible bond has two types of values: 

  • Conversion value: the price of the share is higher than the conversion price in the conversion period. It is then attractive for you to exercise your right and to convert the bond into shares. 
  • Bond value: the price of the share is lower than the conversion price in the conversion period. Converting is then not attractive and the convertible bond behaves like a normal bond: under normal circumstances, the issuer will pay the interest to you every year on the coupon date and repay the entire amount of the bond on the maturity date.
Perpetual bonds

A perpetual bond is also called a revolving bond. It is a bond with no maturity date. As a result, you do not know when you will get your money back. The issuer usually has the option to repay the perpetual bond early at predetermined times. However, whether it actually does so depends on the conditions agreed upon when the perpetual bond was issued and on the developments in the stock market. The issuer can also decide to skip the interest in a given year; this is called passing. Perpetual bonds offer a higher coupon interest than comparable regular bonds, but this comes in exchange for the uncertainty of whether you will receive all the interest and when you will get your money back. The price of a perpetual bond also responds more strongly to a change in interest rates than a regular bond.

Asset Backed Securities

Asset Backed Securities are bonds in which the coupon interest and the repayment of the bond are based on collateral of packages of different types of loans. This concerns, for example, packages of mortgages and car financing. We also refer to Asset Backed Securities as repackaged loans. The issuers may issue the underlying packages in different tranches (parts). Each tranche has its own credit risk.

Investing in Asset Backed Securities is risky. This is because it is often unclear what exactly the collateral consists of. It is also difficult to estimate the risk of large groups of people being unable to repay their mortgages or loans. This makes the credit risk of Asset Backed Securities much more unclear than the credit risk of a regular bond, where the credit risk consists only of the risk that the issuer cannot repay the bond. 

Asset Backed securities were one of the main causes of the US credit crisis in 2007, the collateral consisted mainly of mortgage packages with a variable rate. When mortgage rates soared, many US citizens were unable to repay that higher interest rate on their mortgage or even the entire mortgage. As a result, the Asset Backed Securities very quickly lost all of their value or had very little value left.

 

Investing in complex bonds through ABN AMRO

If you invest independently with ABN AMRO, you can only invest in complex bonds through Self-directed Investing Plus. You can buy and sell complex bonds using the ABN AMRO app, Internet Banking, or My Dealingroom.

Learn how to place an order with the ABN AMRO app and Internet Banking

Discover the possibilities of My Dealingroom

Before you can invest in complex bonds with ABN AMRO, we ask that you first complete a knowledge test. You can take this test via Internet Banking, and you will receive an invitation for it when you apply for Self-directed Investing Plus with us. If you pass this test, you have sufficient knowledge to invest in complex bonds. If you do not pass, investing in complex bonds may not be suitable for you. In that case, you will not be able to place orders in complex bonds.

Investing involves risks

Investing involves risks. You could lose (some of) the money you invested. If you are going to invest, it is important that you are aware of this. Invest with money you can spare. Read more about the risks associated with investments.