ECON 310 Financial Institutions Section 1

Topic: The development of bond financing in Hong Kong

Group 1 Ray, Ho Lung Kei …… 033 165 Bong, Lee Ching Bong …… 033 167 Eric, Leung Ka Kit …… 033 184 Matthew, Shi Wang Tung …… 033 194 Alan, Yuen Wai Lun …… 033 229

本節目純屬虛構

投 資 男 Tau Zi Nam

MC : Matthew Shi Guests : Alan Yuen (P.R. of HKMA) Bong Lee (Representative of HKAB) Eric Leung (Investment Expert) Ray Ho (Investment Expert)

Hotline: 1878 333

What is bonds? debt instrument with the purpose of raising capital by borrowing. a promise to repay the principal and interest on specified dates without voting right

Situation of Bonds Market in Hong Kong 2002 2003 2004 Equity market (Total market capitalization) (million HK dollars) 3,559,099 5,477,670 6,629,176 Bonds market (par value) 516,437 438,919 447,260 Source: http://www.hkex.com.hk/data/factbook/2004/c/12.pdf

Situation of Bonds Market in Hong Kong 45.7% $17,644.8 $71.8 160.3% HKSAR Source: http://asianbondsonline.adb.org/documents/abm_nov2004.pdf

Situation of Bonds Market in Hong Kong 45.7% of GDP in 2003 Much smaller than other developed countries such as Japan, USA

Why does the bond market of Hong Kong are relatively small? New Exchange Fund paper will only be issued when there is an inflow of funds Hong Kong government seldom have deficit Unlike US government, the Treasury Bill are issued to solve the financial deficit For private cooperation: complicated procedure and high cost of issuing bonds Small investors hard to enter the market  needs a large amount of capital.

The needs of developing a bond market Absence of a developed bond market causes volatility Risks brought by the “Two-way traffic of investment flows” Aging population calls for demand

Competitive advantage of Hong Kong market The soundness of the financial system the market economy the high transparency of legal system

Three refinements of Exchange Fund Notes by HKMA greater flexibility to select some specific issues improvement of price attractiveness strengthen the distribution network

Phone-in time 聽你地咁講， 投資債券好似唔錯喎， 不過我仲想知投資債券有咩前景呢，同埋投資前有咩要知架? 1st question: 聽你地咁講， 投資債券好似唔錯喎， 不過我仲想知投資債券有咩前景呢，同埋投資前有咩要知架?

What you need to know before buying a bonds? Yield Maturity day Bond price Coupon rate

Advantage of buying bonds From the views of investors. Take a stable return from your assets. Enrich the investment portfolio, bare the risk, do not put your eggs in one basket.

Advantage of buying bonds From the views of the government and companies. Stabilize the financial market. A extra fund sources.

Future of Hong Kong Bonds Market Definitely Hong Kong Bonds Market will become bigger and bigger in the future. With advantages under one country two policy and as a international financial Centre. Hong Kong can play a role as a promoter of the bonds from China’s corporation.

How to buy and sell bonds? IPO Through recognized dealers and market makers e.g.BANK OF CHINA, BANK OF EAST ASIA, HANG SENG BANK, HSBC List of recognized dealers and market makers http://www.info.gov.hk/hkma/eng/infra/cen_money/exel/cmup8027.pdf

Recommendation-EFN HKSAR (Exchange Fund) is the issuer Minimum lot size of Exchange Fund Notes is HK$50,000. Tenders above this minimum must be in the multiples of HK$50,000. 6 benchmark tenors: 2-year, 3-year, 4-year, 5-year, 7-year and 10-year

Recommendation-EFN Several EFN Recognized Dealers and Market Makers support, with different degree of commitments in primary and secondary markets. With HKMA policies encourage investors to enter the bonds market helps the circulation of the bond notes enlarge the total bonds market in Hong Kong.

Phone-in time 咁多位，我見到D債券既介紹入面有D咩「Aa3」呀,「AA+」呀咁， 咩黎架? 同埋投資債券有冇風險架? 2nd question: 咁多位，我見到D債券既介紹入面有D咩「Aa3」呀,「AA+」呀咁， 咩黎架? 同埋投資債券有冇風險架?

Ratings Credit Risk Moody's Standard & Poor's Fitch IBCA Aaa AAA INVESTMENT GRADE Highest quality and lowest risk Aaa AAA High quality (very strong) Aa (1,2,3) AA (+ -) Upper medium grade (strong) and strong credit repayment A Medium grade and enough ability to repay credit Baa BBB *Under Aaa or AAA, in each levels of grading, e.g. Aa or AA, have been divided into 3 detail grading, (Aa1, Aa2, Aa3) and (AA+, AA, AA-)

Ratings Credit Risk Moody's Standard & Poor's Fitch IBCA Ba BB B Caa NON - INVESTMENT GRADE Lower medium grade (somewhat speculative) Ba BB Low grade (speculative) B LOW GRADE Poor quality (may default) Caa CCC Highly speculative Ca CC Extremely poor prospects (have no repayment) C In default D *Under Aaa or AAA, in each levels of grading, e.g. Aa or AA, have been divided into 3 detail grading, (Aa1, Aa2, Aa3) and (AA+, AA, AA-)

BONDS PRICE = Issuer ABC Limited Coupon 7% Coupon Frequency (Per Year) 1 (annual) Rating A3 Issue Date Jun 1, 2001 Maturity Date Jun 1, 2006 Currency HKD Redemption amount 100%

Risks Interest rate Risk Interest rate Bonds price Default Risk Will issuers pay back the premium and interest? Liquidity Risk The bid/ask spread can jump up to 2% Currency Risk When the bond denominated in foreign currency, it is subjected to currency risk

節目重溫 http://www.syc.com.hk/tauzinam.htm

特別鳴謝: Joe Wong 聲音演出: 賴越輝 江嘉豪 音響: 金陪達 攝影: 杜可瘋 美術: 奚中文 道具: 大力 場務: 長毛 監製: 史提芬周 投資涉及風險 債券價格及收益可升可跌 Always consider your limits and the risks you are willing to take when investing bonds. 以上內容為嘉賓個人意見 並不代表本台立場

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MC Question 1 The minimum lot size of EFN is: $10,000 $30,000 $50,000 $70,000

MC Question 2 In 2003, the bond market of Hong Kong equaled _______ of the GDP. 35.7% 45.7% 55.7% 65.7%

MC Question 3 Which of the followings is not the refinement by HKMA? Greater flexibility to select some specific issues Improvement of price attractiveness Strengthen the distribution network Increase the minimum lot size of EFN

Thanks for your kind attention! The End Thanks for your kind attention!