Introduction to the Thai Debt Markets

A fixed-income security is an instrument that allows the Thai Government and Thai companies generally called issuers to borrow funds from investors. In its simplest form, a fixed income security is a financial obligation of an entity that promises to pay a specified sum of money at specified future dates. The Thai entity that promises to make the payment is called the issuer of the security. Examples of issuers are the Government of Thailand issuing Thailand Investment Bonds. In other words, the issuer is the borrower of funds, whereas the investor who purchases such a fixed income security is called the lender or creditor. The promised payments that the issuer agrees to make at the specified dates consist of two components: interest payments and repayment of the amount borrowed. Fixed income securities that are debt obligation include bonds, mortgage-backed securities, asset-backed securities and bank loans.

Maturity of Thai Bonds

The term to maturity of bond is the number of years over which the issuer has promised to meet the conditions of the obligation. The maturity date of a Thai bond refers to the date that the debt will cease to exist, at which me the issuer will redeem the bond by paying the amount borrowed. The general practice in the Thai bond market is to refer to “maturity” as “term” or “tenor”. Maturities typically range from overnight to 10 years in Thailand. Fixed-income securities with maturities at issuance of one year or less are known as money market securities. In Thailand, they are called Treasury Bills, which are issued by the Bank of Thailand at frequent intervals. There are bonds of various maturities. Bonds in Thailand are issued for terms of 1 year, 3 years, and 10 years.

The par value of a Thai bond is the amount that the issuer agrees to repay the bondholder at the maturity date. This amount is also known as the principal, face value, redemption value or maturity value. Thai Bonds can have any par value.As Thai bonds can have different par value, the prices of the bonds are generally quoted as a percentage of its par value. A value of 100 means 100% of par value. For example, if a bond has a par value of Baht 1000 and it is trading at Baht 900, then the bond is said to be selling at 90. Similarly, if the same bond is selling at Baht 1100, then it will be quoted as selling at 110. The bond may trade below or above its par value. When a Thai bond trades below its par value, it is said to be trading at a discount, whereas when a Thai bond is trading above its par value it is said to be trading at a premium.

Thai Coupon Rate

The interest rate that the Thai issuer agrees to pay each year is called the coupon rate; the total annual interest amount to be paid in one year is called the coupon. The coupon is determined by multiplying the coupon rate by the par value of the bond that is:

Coupon = Coupon Rate X Par Value

Coupon payments can be made annually, semi-annually, quarterly or even monthly, but generally in Thailand annual or semi-annual payments are popular.

A conventional Thai bond pays a fixed rate of interest. In this type of bond, there is no change in the coupon payments during the life of a bond, in other words, unless the bond matures. Bonds that pay a floatang rate of interest are called floating-rate bonds. The coupon rate of a floating rate bond includes two components: a reference rate, plus a spread. The spread, called the excess margin, is usually constant and expressed in basis points (bps); a basis point is equal to 0.01%. The excess margin or spread as it is called is set when the bond is issued and depends on the creditworthiness ofthe issuer at the me of issuance. The higher the creditworthiness of the issuer the lower the spread and vice versa. The reference rate is reset periodically; the reference rate in Thailand is Treasury Bill Rate (T-bill) of the SBP. A floating rate bond may also have restriction on the maximum coupon rate that will be paid at any reset date that is called a cap. Similarly, there could be a minimum coupon rate specified which is called a floor.

Zero-Coupon Thai Bond

A zero-coupon bond, also known as an “accrual bond,” is a debt security that does not pay interest (a coupon) but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value. Some zero-coupon Thai bonds are issued as such, while others are bonds that have been stripped of their coupons by a Thai financial institution and then repackaged as zero-coupon bonds. Because they offer the entire payment at maturity, zero-coupon bonds tend to fluctuate in price much more than Thai coupon bonds. When a zero-coupon bond matures, the investor receives one lump sum equal to the initial investment plus the imputed interest. The maturity dates on zero coupon bonds are usually long term.

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