Investors have been inundated with advertisements on bonds and other fixed income offerings over the last five months as more companies raise financing from different mediums other than a regular bank loans. While this can be a great opportunity for some, several young investors are still trying to understand these offers and what they mean for them. Today’s Sunday Finance story will explore the Jamaica Stock Exchange’s (JSE) Bond Market and what really is fixed income.

A bond is simply a loan between two parties with an entity like a company borrowing money (issuer/borrower) and a party that lends the money (investor/lender). The party that lends the money can be an institution like an insurance company or an individual investor who wants to get a positive return on his/her money. The party that borrows the money could be a company wanting to purchase new equipment, a municipality like New York City or a government looking to access money for major capital projects.

Fixed income is simply a term which means a “fixed” or steady income stream from a pension or investment. A bond pays a steady income stream to an investor with the time of the payments set in advance.

The JSE Bond Market is simply an avenue that allows bonds that have been issued, to be traded by investors who may need to cash out some or all of the investments before the time specified in the agreement. Companies wishing to have bonds traded through this market register a prospectus with the Financial Services Commission (FSC), the regulator of financial securities in Jamaica. A prospectus is a document that provides details about an investment offering for sale to the public. It outlines things like, the minimum amount a person can invest in the offer, what the company borrowing the money actually does, what has its financial performance been like over five years and what does it intend to do with the money.

A feature of companies issuing bonds through this market is that the minimum an investor can invest is $20,000. This is in contrast to the $100,000 minimum done for bonds issued as a highly rated debt securities under FSC regulations. Other bonds issued under FSC regulations might require $10 million if you’re not an accredited investor, which is typically understood to be a high net worth individual or entity as per defined FSC regulations.

So, the big question is, how does the average person benefit from purchasing a bond? Let’s refer to the Mayberry Investments Limited bond offering in January 2023 where it raised $6.39 billion across four tranches. An investor that bought tranche I and invested the minimum $20,000 would have received 9.25 per cent on their money for 13 months. Interest rates quoted are normally annualised, which means calculated over 12 months.

Mayberry Investments made a special non-obligatory interest payment to successful applicants after the offer closed. This translated to $119.48 in one instance for an investor. The first interest payment was $269.79 with another three payments of $350.73 every quarter. The final payment made to an investor in February 2024 was $20,204.27. So, an investor that invested $20,000 would have had received $1,645.73 in total interest over the 13 months, which is after accounting for the 25 per cent withholding tax.

While that sounds relatively small, please note that the same amount invested on a bank certificate of deposit (CD) instrument at 3.05 per cent for a year would only yield $457.50 after accounting for the withholding tax on interest. Also, the CD could not be sold and if redeemed earlier, there could be a penalty for breaking the agreed period.

Since the bond is tradable on the JSE, an investor could have always sold the bond and invest it into another financial investment. A bond is usually issued at par with a face value of about $100, which is the amount you will be repaid at maturity. If you purchased, for example, 1,000 units at $95, you’d have spent $95,000 and received $100,000 at maturity as that is based on the agreed price from the issuer from day one. This is before accounting for any interest payments that would be paid up to maturity.

The fees involved in the bond transaction include the broker’s commission, JSE cess, JCSD fee and general consumption tax. Let’s say you’re buying 10,000 units of a bond at $95 which is a value of $950,000. A commission of 0.50 per cent is $4,750, the JSE fee of 0.025 per cent is $237.50 and JCSD fee of $500. GCT is 15 per cent on the sum of the fees ($5,487.50) which is $823.12. So, the total cost of the transaction would be $956,310.62 and if an investor held the bond until maturity, they’d receive $1 million which translates to $43,689.38 in profit.

The JSE and its subsidiary has made significant strides in the last year with Tax Administration Jamaica (TAJ) to make it easier to recover withholding tax on interest from your bonds. Investors can reclaim the 25 per cent withholding tax 45 days subsequent to the payment date. A solution was recently launched as well to allow investors to access their withholding tax certificates from TAJ.

The JSE Bond Market was relaunched in October 2013 and has had several listings since then. Mayberry Investments’ remaining three tranches are listed on the Jamaican dollar bond market while Express Catering Limited became the first company to issue a bond on the USD market. Mayberry Jamaican Equities is currently seeking to raise $2.25-$3.38 billion in its ongoing bond offer.

So, why would someone get a fixed income investment like a bond in the first place? Some people need a stable investment that will pay them a continuous stream of income for their desired purposes. For a low-risk investor who doesn’t like too much risk, a bond issued by an entity with a high credit rating and stable business will fulfil their desires of income security. Insurance companies and banks will invest in bonds so that they can run their operations and fulfil their general obligations.

However, bonds are not a risk-free investment. An issuer can request a ‘haircut’ which means they could ask to repay you less principal when the bond matures. The issuer could request for an extension to repay the bond which can be an issue if you need the original investment (principal) to put into another investment like a house. The worst-case scenario is the issuer defaulting on the bond which means that you have to navigate the legal headwinds to recover your money.