What Are (Bonds)? A Comprehensive Guide for Vietnamese Investors

Why Is It Important to Learn About Bonds?

In the investment world, besides stocks, bonds are a noteworthy financial tool but often overlooked. The corporate bond market in Vietnam has experienced impressive growth, averaging 35% per year from 2016 to 2020. However, many new investors feel confused about choosing bonds or stocks, or even don’t know where to start.

This confusion is completely normal. To help you understand better, this article will guide you through basic knowledge about bonds and how to start your bond investment journey in Vietnam.

What Are Bonds? Definition and Basic Characteristics

Bonds (bonds) are essentially debt securities, fundamentally different from stocks. When you buy a bond, you are essentially lending money to the issuing organization, which could be the government or a company. In return, they commit to paying you periodic interest at a fixed rate, and ultimately return the principal amount at the end of the investment period.

In other words, if you buy a bond, you become a creditor of the issuing company or government, not a shareholder.

Bonds have three main features:

• Have a fixed term and fixed or floating interest rate: Each bond clearly states its maturity date and the interest rate you will receive.
• Can be issued in various forms: Certificates, electronic entries, or digital data.
• Combine profitability, risk, and liquidity: Although they carry lower risk than stocks, bonds still have certain risk factors.

Two Common Types of Bonds in Vietnam

( Government Bonds: High Safety, Stable Interest Rates

Government bonds are bonds issued by the State to cover budget deficits or finance public projects. They are very safe because they are backed by the government, usually with fixed interest rates. The maturity of government bonds is typically longer, from 5-30 years depending on the type.

The risk of these bonds is almost negligible, but the downside is that the interest rates are usually not very high.

) Corporate Bonds: More Flexible, Higher Interest Rates, But Riskier

Corporate bonds are issued by companies or corporations to raise capital for business activities or financial needs. The interest rate can be fixed or floating, with shorter terms ###1-3 years###, offering investors greater flexibility. However, there is a risk of default, and the interest rate often reflects this risk.

Additionally, some corporate bonds are convertible into stocks, providing an opportunity for capital appreciation.

Comparison: Bonds, Stocks, and Foreign Stocks

To understand the position of bonds within the overall investment landscape, consider these three tools:

Bonds are debt securities with fixed returns, defined terms, and low risk. You profit mainly when bonds appreciate in value or receive periodic coupons (interest payments). The initial capital is relatively high (at least 100 million VND if investing directly), but leverage is very low. The purchase process is simple: just need an account at a securities company like VPS, MBS, Vndirect, or SSI.

Stocks are equity securities, representing ownership in a company. Profits come from dividends or capital gains. The initial capital is also high, but profit potential is much greater than bonds. Like bonds, you buy stocks through domestic securities firms.

Foreign Stocks (such as Apple, Facebook, Google) require very low capital thanks to high leverage (1:20 or more), allowing you to profit from both rising and falling prices, with potential dual-direction returns. However, the risks are also proportionally higher.

Conclusion: If you are a new investor with idle capital and want safety, government bonds or bank bonds are good choices. If you seek higher returns and are willing to accept risks, corporate bonds or stocks are more suitable.

Different Types of Bonds

( Classification by Interest Rate

Bonds with fixed interest rates provide certainty: you know exactly how much you will receive each period. Bonds with floating interest rates have coupons that change according to the market, suitable when you expect interest rates to rise. Zero-coupon bonds do not pay interest but are purchased at a discount to face value, offering profit at maturity.

) Classification by Guarantee

Secured bonds are backed by tangible assets, reducing risk. If the issuer defaults, you have the right to seize those assets. Unsecured bonds rely solely on the issuer’s creditworthiness.

Special Types

Convertible bonds allow you to convert into company stocks when stock prices increase. Warrant bonds come with the right to buy stocks at a fixed price. Callable bonds can be repurchased by the issuer before maturity.

Conditions to Start Investing in Bonds

The first step is very simple: open an account at a Vietnamese securities company. Major and reputable securities firms like VPS, MBS, Vndirect, SSI all provide bond trading services. Opening an account and verifying your personal information takes only a few minutes.

Once you have an account, you can choose two investment methods:

Direct Investment: You sign a bond purchase contract with the issuer, transfer money, receive a certificate of ownership, and finally receive interest at maturity. Costs include personal income tax, transfer fees ###related to the contract, printing###, and transfer fees. The average capital needed is about 100 million VND.

Fund Investment: You open a trading account, register to buy fund certificates, place buy/sell orders according to regulations, and have the right to hold or trade as needed. Costs include personal income tax, transaction transfer fees, annual management fees, and early redemption penalties. The lower capital requirement is only 5-10 million VND to participate.

Important Terms to Know

Issue Date: The date the bond starts circulating and accrues interest.

Maturity Date: The date the bond matures, and you receive back the principal.

Coupon: The interest rate the issuer commits to pay at each interest period.

Face Value: The basis for calculating coupons, usually 100,000 VND or 1,000,000 VND in Vietnam.

Interest Payment Period: How many times per year you receive coupons (usually 1, 2, or 4 times).

NAV (Net Asset Value): The estimated current asset value of an open-end fund, calculated as the total market value of assets minus liabilities.

CAGR: The compound annual growth rate, helping you compare investment performance over years.

Criteria for Choosing Suitable Bonds

When deciding which bond to buy, consider these criteria:

Choose reputable issuers: Prioritize bonds from the Government, large banks (such as Vietcombank, Vietinbank, Techcombank, HDbank), or leading companies in their industries. Look for organizations with transparent information disclosure.

Assess financial health: Select organizations with transparent, healthy financial conditions, and no warning signs.

Check management quality: Trustworthy management focusing on traditional business operations, always considering long-term corporate interests.

Prioritize secured bonds: Bonds backed by specific assets reduce default risk.

Choose bonds audited by major firms: Bonds issued by companies audited by top auditing firms.

Main Risks When Investing in Bonds

Although bonds are safer than stocks, they are not without risks:

Credit risk (default risk): The issuer may be unable to pay interest or principal at maturity. Recent market shocks in corporate bonds like An Đông Company (Vạn Thịnh Phát Group) or Tân Hoàng Minh Group are typical examples.

Prepayment risk: Early repayment of interest, which can significantly reduce your expected returns.

Interest rate risk: Fluctuations in market interest rates affect the value of your bonds.

Frequently Asked Questions

Which bonds should I buy? It depends on your risk preference. If safety is your priority, choose fixed-rate government bonds (high capital preservation). If you accept higher risks for higher yields, choose floating-rate corporate bonds (short-term, flexible).

Are bank bonds safe? Yes, very safe. Bank bonds are highly secure, reputable, and closely monitored. Major banks like Techcombank, Vietinbank, Vietcombank, HDbank are safe options.

Should I invest in bonds or stocks? Both are attractive but different. Bonds are safe, low-risk, with fixed interest. Stocks have higher profit potential but also higher risk.

How much capital is needed to invest in bonds? About 100 million VND for direct investment. Only 5-10 million VND is enough if investing through funds.

Conclusion

The bond market in Vietnam is developing rapidly, offering opportunities for investors seeking safe and profitable tools. However, to invest effectively, you need to understand key terms, basic indicators, and the risks involved.

If you are a new investor with idle capital, government or bank bonds are a good starting point. As you gain knowledge and experience, you can explore corporate bonds with higher interest rates. Make smart choices, evaluate issuers carefully, and always remember that every investment carries its own risks.

Wishing you success in your bond investment journey!