Key Risks and Features

Fixed Income Risk Disclosures

A bond is a debt instrument in which the issuer agrees to pay the bondholder a fixed interest amount, known as the coupon. The coupon can be paid either semi-annually or on an annual basis, depending on the terms of the particular bond. Most bonds have a final maturity date when the bond issuer returns a set amount of money, the principal, to the bondholder.

Bonds are considered to be lower risk than equities, although the level of risk depends on a variety of factors. Government bonds are generally lower risk than corporate bonds as governments are less likely to default on their debt than companies.

Corporate bonds hold seniority rankings which determine the priority of repayment in the event of a company’s liquidation or bankruptcy. These range from the highest priority senior secured bonds, which are backed by collateral and offer higher recovery rates, to the lowest priority unsecured subordinated and junior debt. Unsecured bonds have only the issuer’s name and credit rating as security.

Permanent Interest-Bearing Shares (“PIBS”) are subordinated debt with either a fixed or floating interest rate which rank lower than senior bonds in the event of issuer liquidation. Unlike bonds, PIBS don’t have a fixed redemption date but the issuer has a call option to buy them back at certain times.

Market Risk

The length of time to maturity affects the price of the bond and how much the market price may fluctuate.

The price of a bond may fluctuate and if the bondholder sells the bond before its maturity date, the price obtained may be lower than the original purchase price. The longer the time to maturity, the greater the risk of significant price fluctuations.

Bond price fluctuations can be caused by macroeconomic or issuer specific factors. Examples include social or governmental issues in the home country of the bond issuer and market perception of the creditworthiness of the issuer. External factors may impact a single issuer, issuers within a particular industry sector or the whole market.

Volatility Risk

Bonds can be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer, general market liquidity and other economic factors.

Liquidity Risk

Exchange traded (“listed”) bonds are more liquid than bonds which are traded ‘over the counter’ (“OTC”) i.e. those that are not listed.

Most corporate bonds are traded OTC. As there is less price formation information in the OTC market, it might not be easy to determine the price of an OTC bond.

Generally, investment grade bonds (bonds that are considered to have a lower risk of default and receive higher ratings by the credit ratings agencies) are more liquid and are therefore easier to buy and sell.

Trading in the bonds of smaller companies can be less frequent than larger companies and therefore may be subject to periods of illiquidity. Investors seeking to realise their investments at this point may have to accept a price at a significant discount to the last traded price.

Credit Risk

This risk represents the extent to which the government or corporate bond issuer will be likely / able to repay the loan and / or any interest accruing to it.

If the bond issuer is unable to pay the accrued interest, the bondholder will not receive the semi-annual or annual coupon.

If the bond issuer is unable to repay the principal, the investor may lose their entire investment.

Credit Rating Agencies

Credit Rating Agencies publish a credit rating on companies and governments which issue bonds. Rating decisions are based on factors such as background and history of the company, corporate strategy and philosophy, perceived business and financial risks and analysis of the management team.

Based on the ratings given by rating agencies, bonds can be broadly divided into two tiers of credit risk:

Investment grade - high-medium grade bonds that have a lower risk of credit default.
Non-investment grade - high yield bonds which have lower credit ratings than investment grade bonds, are more speculative in nature with the lowest grade being considered ‘junk’.

Currency Risk

Bonds may be denominated in different currencies and the investor may therefore be exposed to fluctuations in foreign exchange rates. A movement in exchange rates may have a favourable or an unfavourable effect on the gain or loss achieved.

Concentration Risk

Holding large positions in a small number of fixed income products (i.e. holdings that focus on a single country and / or sector and / or lifespan and / or yield) creates concentration risk.

Concentration risk in fixed income products exposes a portfolio to greater sensitivity to interest rate changes and potential loss of investment in the event of a downturn in a particular country or industry sector.

Conflicts Risk

IBP may take and / or hold positions that conflict with those of our clients. Further details regarding the handling and execution of client orders can be found in the IBP Order and Best Execution policy.

Conflicts arising from IBP’s business model are managed through internal controls and processes, as detailed in IBP’s Conflicts of Interest policy.

Transparency

Investing in bond markets carries certain risks related to transparency. Due to the over-the-counter nature of many bond trades, pricing can often lack real-time clarity, leading to potential mispricing and market inefficiencies. Additionally, information asymmetry may exist, where some market participants have access to better information than others, affecting investment decisions and outcomes.

Margin Risk

Margin risk is not applicable to bonds.

Contingent Liabilities

Contingent liabilities are not applicable to bonds.

Exit Costs

Early exit fees are not applicable to bonds.

Leverage

Leverage is not applicable to bonds.

Interest Rate Risk

Bond prices tend to have an inverse relationship to interest rates. Bonds with a higher coupon rate are likely to be valued more highly when interest rates are low than when interest rates are high.

The longer the maturity of the bond, the more risky it can be due to impacts of interest rate changes. Short term bonds are therefore considered lower risk than longer term bonds.