Economics of Bonds: A Comprehensive Guide for New Investors in Vietnam

In the universe of securities, besides stocks, bonds are a much safer income channel. Especially when you have idle cash and want it to “work” without taking on too much risk.

In Vietnam, the corporate bond market grew an average of 35% per year from 2016 to 2020, but many people still do not fully understand how it operates. This article will help you grasp everything from A to Z about bonds, from basic definitions to where to buy bonds and points to watch out for.

What Are Bonds? Why Should You Care?

Simply put, a bond is a loan you give to organizations such as (government, banks, or businesses), and they pay you interest periodically. The bondholder is a creditor, not an owner.

Main features of bonds:

• Have a clear maturity date and fixed interest rate
• Can be issued in various forms: certificates, electronic records
• Are income-generating, carry certain risks, and have liquidity potential

In Vietnam, the two most common types of bonds are government bonds (issued by the state, with very low risk) and corporate bonds (issued by private companies, offering higher profits but also higher risks).

Types of Bonds You Should Know

Classification by Issuer

• Corporate bonds: Issued by companies to raise capital for business development
• Government bonds: Issued by the state to balance the budget or fund public projects
• Bank bonds: Used by financial institutions to increase operational capital

Classification by Interest Payment Mechanism

• Fixed interest rate: You always receive the agreed-upon interest
• Floating interest rate: The interest rate changes according to the market
• Zero coupon: No periodic interest, but purchased at a discount below face value

Classification by Security Level

• Secured bonds: Issued with assets as collateral; in case of default, you can seize those assets
• Unsecured bonds: No collateral, depend on the issuer’s creditworthiness

Bonds or Stocks? Which Suits You?

This is a common question among new investors.

Bonds offer stable returns, have a fixed term, low risk, but relatively modest profits. Suitable for those who prefer “peace of mind” without worries.

Stocks are like a chili pepper — with the chance to earn big profits but also high risk. Suitable for investors comfortable with volatility.

Foreign stocks (such as US stocks: AAPL, GOOGL) differ: lower investment, potential for two-way gains (rise or fall both profitable), but with higher risk.

If you are a new investor with limited capital and want quick profits, foreign stocks are more attractive. But if you prefer a stable, long-term investment channel without daily worries, domestic bonds are a reasonable choice.

Where to Buy Bonds? Step-by-Step Guide

Necessary Conditions

To buy bonds in Vietnam, you just need to open a trading account at reputable securities firms like VPS, MBS, Vndirect, SSI, etc. The account opening process takes only a few minutes.

Two Ways to Buy Bonds

1. Direct Investment:

• Step 1: Sign a bond purchase contract with the issuer
• Step 2: Transfer money as per schedule and receive ownership certificates
• Step 3: Receive interest periodically until maturity, then get back the principal

Important costs: Personal income tax, transfer fees, remittance fees.

2. Investment via bond funds:

• Step 1: Open an account and register to buy fund certificates
• Step 2: Place buy/sell orders according to regulations
• Step 3: Hold or resell as needed

Important costs: Personal income tax, transfer fees, fund management fees, early sale penalty fees.

Essential Terms You Must Know

• Issue date: When the bond starts circulating and interest begins
• Maturity date: When the bond matures, and you receive back the principal
• Coupon: The periodic interest rate that the issuer commits to
• Face value: Used to calculate interest (usually 100,000 VND or 1,000,000 VND in Vietnam)
• Interest period: Number of times per year you receive interest
• NAV: Estimated asset value of the fund
• CAGR: Average annual return rate

How to Choose Bonds Wisely

• Prioritize reputable organizations: Government, large banks, leading companies
• For corporate bonds, select companies with clear competitive advantages and stable operations
• Check the issuer’s financial health via public reports
• Prefer bonds with collateral
• Choose companies audited by major auditing firms

Risks You Need to Know

Credit risk (default): Issuer unable to pay interest or principal at maturity. Recently, Vietnam has seen cases like An Đông Company, Vạn Thịnh Phát Group, Tân Hoàng Minh Group.

Early repayment risk: Bonds are repaid earlier than expected, significantly reducing your interest income.

Interest rate risk: Changes in market interest rates affect your bond’s value.

How Much Capital Is Needed?

• Direct investment: Average of 100 million VND
• Via funds: Lower, from 5-10 million VND

Conclusion

The bond market is complex, but if you understand the basic concepts, know where to buy bonds, and are aware of the risks, it can be a valuable investment channel. Bonds are suitable for knowledgeable investors with solid capital who seek stability. Start with government or large bank bonds to gain experience before investing in corporate bonds.

Wishing you successful investing!