Tue | Dec 6, 2016

Advisory Column: Buying foreign bonds

Published:Sunday | April 5, 2015 | 12:00 AM

QUESTION: I am just doing some research to start my investment efforts. Is it possible for Jamaican persons to buy foreign bonds - USD, especially - and what are the associated fees and the process?

- Jermaine

FINANCIAL ADVISOR: Jamaicans are able to purchase foreign bonds issued in US currency. In fact, they can purchase bonds issued by governments and corporations from many countries as well as Jamaican bonds denominated in foreign currencies. These are called global bonds or euro bonds.

To buy a bond, you would need to employ the services of a licensed securities dealer. You would be required to open an account by completing a client agreement form, presenting two forms of identification, your taxpayer registration number, proof of address and two references.

If you do not have US currency and the dealer operates a cambio, you may purchase the foreign currency from the cambio.

If you know the particular bond that you wish to purchase, the dealer or dealer representative can source it for you, but if you do not know which bond you want, the investment professional can assist you to identify a bond that is suitable for you, that is, one that can best meet your objectives. You should thus be clear about what your objectives are.

Generally, the minimum amount you would be able to buy is US$1,000 nominal, that is, the face amount. Depending on the price, the cost to you could be more or less than US$1,000. For example, you would pay US$900 if the price was US$90 and US$1,100 if it was US$110. Bonds trade in multiples of US$1,000 face value.

In other cases, the minimum could be as high as US$200,000, but some dealers tend to vary this and sell smaller amounts. In such a case, if you decided to sell before the bond matured, this could pose a potential challenge as the smaller amount would be below the minimum level that is transferable.

Some dealers ease this problem for their clients by buying these smaller amounts from them at the prevailing price, but there is no guarantee that this will happen.

NOPHYSICAL CERTIFICATES

As your holdings would be held in electronic form, this is the form in which they would be transferred; there are no physical certificates. But you should have nothing to fear as there is a central facility for holding all of these positions, such as the central securities depository at the Bank of Jamaica - known as JamClear-CSD - in the case of Government of Jamaica global bonds.

The bonds issued abroad are held by several entities similar to JamClear-CSD with which the overseas dealers have accounts, much like our case in which the local dealers have an account with the CSD.

In regard to the fees charged on foreign bonds, and local bonds as well, there is not generally a set fee. Dealers buy at one rate and sell at another. If, for example, the dealer bought a bond at a yield of 7.75 per cent per annum, the price you would pay would be such that the yield to you would be 7.50 per cent or some other yield below 7.75 per cent. This is what happens when dealers say they take a spread.

The spread taken can be influenced by many factors: demand for and supply of the instrument, the size of the transaction and general market conditions, for example.

Buying foreign bonds is similar to buying local bonds, and considering that there are several legitimate sources from which foreign exchange can be sourced and that there are several licensed securities dealers who deal in these securities, it should not be difficult to access such bonds. It is important, though, to pay careful attention to their quality.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. finviser.jm@gmail.com