Offshore Bonds

Offshore bonds refer to securities issued by governments, government agencies, corporations or other institutions in foreign countries whereby the issuers promise to pay interest at prearranged rates (coupon rate) at regular intervals before maturity of the bonds and repay the stated amount of principal (face value) on maturity of the securities. Return on bonds is the fixed income at regular intervals or the capital gains from the rise in price of the security. The security and volatility of Bonds differ with relevant corporate ratings. Bond yield and risk also vary with market performance.

Features of investment in “Offshore Bonds”

• Interest rates may be higher than time deposits with banks in the same currency with the same tenor.
  Within the bond’s tenor, investors are entitled to interest income under the issuance regulation. The frequency of interest payout varies with individual bonds, which is usually payable monthly, quarterly, semi-annually or annually. Generally, the coupon rates offered are higher than the interest payable from time deposits with the same tenor. By investing in bonds, you may get higher interest income than time deposit with banks.
• The issuers promise to repay the principal at maturity*
  Further to the interest payment at coupon rate, bond investors are entitled to the repayment of principal at maturity at face value under the condition that there is no default.
• Potential capital gain
  The market prices of bonds may vary with the changes in credit rating of the bonds and interest rates. Where investors may choose to redeem the bonds before maturity, they may benefit from the spread if the market price of the bond they held is higher than the acquisition price of the same bond, which constitutes realization of capital gain. For example, an investor bought a particular bond at USD10,000 and redeemed the bond before maturity. At the time of redemption, the price of the bond rose to USD10,100, the extra USD100 is the capital gain for the investor.
• Tax benefit for offshore incomes**
  According to the Tax Code of the Republic of China, offshore incomes for individuals are tax exempted. As such, interest income and capital gains from investment in offshore bonds are tax free.**
  *The issuers promise to repay the principal at maturity of the bonds. However, investors shall still assume the credit risks of the issuers.
  **Any change in the Tax Code may affect the tax status of offshore incomes. Therefore, the tax shelter effect may alter.

Types of “Offshore Bonds”

• Fixed rate bonds: a fixed coupon rate is offered to the investors. The issuer will pay out a fixed amount of interest to investors at regular intervals as stated. This is the most common type of bond in the market.
• Floating rate bonds: Coupon rate is dynamic, and is usually determined by a standard rate plus a spread. Therefore, interest payable from the floating rate bond is not fixed each time. The standard interest rate is usually determined with reference to the rates applicable to market in good standing, such as the prime rate, Treasury bill interest rate or LIBOR.
• Zero-coupon bonds: this type of bond is usually offered at discount and pays no interest within its tenor. Investors are entitled to the repayment of principal at the face value of the bond at maturity. The return on investment in this type of bond

Offshore Bond Related Information

• Fees & Channels
• Main risks for investment in “Offshore Bonds”
• Credit Rating & Investment Example

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