A Guide to Issuing Bonds docx

A G u i d e t o I s s u i n g B o n d s
Contents
Introduction 1
What are Bonds? 1
Key Features of Bonds 1
Why Issue Bonds? 3
Risks and Challenges of Issuing Bonds 3
Understanding Bond Price 4
Structuring Bonds – Practical Issues 6
 e Bond Issue Process 8
Listing and Trading Bonds on the SPSE 10
Appendix 11
Information Disclaimer

 e contents of this booklet are believed to be accurate at
the date of issue.  ey are intended for general purposes only
and not considered as providing recommendations or advice.
 e CMDA does not give warranty or accept any liability
(whether arising from negligence or otherwise) for any error
or omission or any loss arising from acting on the information
in this publication, except where under law, liability cannot be
excluded.
1
A G u i d e t o I s s u i n g B o n d s
Issuer -  e business that issues a bond.  e issuer borrows
money from investors (bondholders). Recent issuers in Fiji
include Government and large institutions and companies such
as Fijian Holdings Ltd, Housing Authority, Fiji Electricity
Authority and Fiji Development Bank.
Bondholder - An investor in bonds. A bondholder may be an

individual person, a company or an institution. By investing in
bonds, the bondholder lends money to the issuer.
Price -  e amount a bondholder pays for a bond. In our
example, the price is $100.
Face Value (also Par Value or Principal) -  e amount the
issuer pays the bondholder at the end of the lending period.
Bonds can be issued at diff erent face values. In our example the
face value is $100, which is the same as bonds recently issued
in Fiji.
Note that the face value and price can be diff erent. We will
discuss why this could be the case in Understanding Bond
Price.
Coupon and Coupon Rate -  e coupon rate is the rate of
interest paid on a bond. Interest is usually paid in equal amounts
at regular intervals (e.g. every three, six or twelve months).
 ese are called coupons. In our example, the coupon rate is
6% payable annually.  is means that each year the issuer pays
a $6 coupon (6% x $100 face value).
Coupon rates may be fi xed or fl oating. Fixed rates do not
change during the life of the bond
3
. Floating rates allow periodic
adjustments to refl ect prevailing market conditions.
In Fiji, fi xed rate bonds generally have six-monthly coupon
payments while fl oating rate bonds often pay interest quarterly.
Most bonds have fi xed interest rates.  e alternatives are normally
called Floating Rate Notes (FRNs).
Term (also Maturity) –  is is the life of a bond. At the end
of the term, the last coupon and the face value of the bond is
paid to the bondholder.  e bond is said to have matured.  e

term for bonds in Fiji generally ranges from one year to around
15 years.
Embedded Options - Some bonds give either the issuer and/
or the bondholder the option to take some action against the
other party under certain circumstances.  e general term for
these is embedded options. Examples include call features and
conversion rights.
Yield –  is is a measure of the return that a bondholder makes
on a bond.  e most common yield measures are “running
yield” which measures the return on a bond measure by the
relationship between the coupon and the current bond price,
and the yield to maturity
4
which measures the rate of return on
a bond assuming it is held to maturity including the premium
or discount to the face value.  e term yield in this booklet
refers to yield to maturity.  e higher the yield, the higher the
3
It is more normal for bonds to carry fi xed coupons (hence
the term “fi xed income securities”). In this guide we
generally refer to bonds with fi xed coupons.
4
Yield to maturity is basically the interest rate that equates
the bond’s future cashfl ows to its price.
How are Bond Prices Quoted?
By convention, price is stated as a percentage of the
bond’s face value. For example if a bond’s face value is
$100, a price of 100 means that the bond price is 100% of
the face value i.e. $100. A price of 98.5 is 1.5% lower than
the face value ($98.50) while a price of 102 is 2% higher

than the face value ($102).
Floating Rate Example
A bond’s coupons are linked to the bank bill rate, the
interest rate paid by banks on bills of exchange. The
coupon rate is set at “3% + the bank bill rate”. If the bank
bill rate is 2%, the coupon rate will be adjusted to 5%.
Examples of Embedded Options
n
Call feature – This allows the issuer to pay back (“call”)
the bond early. For example, a bond may mature on 31
December 2008 but allow the issuer to “call” the bond at
any time after 31 December 2006. Generally the issuer
must advise investors and gazette the call date three
months in advance. Call features are an advantage for
the issuer because when interest rates fall, the issuer can
call bonds and refi nance by issuing new bonds at a lower
interest rate (i.e. coupon rate).
n
Conversion rights – This gives a bondholder the option of
converting his / her bondholding into shares of the issuer.
The time at which conversion can take place depends on
the terms of the particular bond. For example, say you
own $2,000 worth of bonds issued by Company X and
the terms of conversion say you can convert to ordinary
shares at $2 a share. You can either convert your $2,000
into 1,000 ordinary shares of Company X or withdraw
your $2,000 when the bond matures. Conversion rights
are an advantage to the bondholder. In our example, the
bondholder can choose to convert to ordinary shares at
$2 if he/she thinks the shares are really worth say $2.10.

Introduction

Raising capital is one of the most important challenges for any
business, be it a company, a statutory authority, town council,
Government or other institution. A business needs money
to expand or to pay for its day-to-day operations. It can get
money in various ways - by earning revenue from its goods and
services, by raising capital from shareholders or by borrowing.
I n
Fiji,
Businesses have traditionally relied on capital from shareholders
and bank loans.  is booklet introduces an alternative way
of raising capital – issuing bonds. We hope to answer the
following questions:
n
What are bonds and how do they work?
n
Why might bonds be a good method of raising capital?
n
What are the risks of issuing bonds?
n
How do you go about issuing bonds?
What are Bonds?
A bond is a type of investment where the investor (the
bondholder) lends money to a company
1
(the issuer) which
issues the bond. As proof that the issuer owes money to the
2
bondholder, the bondholder gets a bond certifi cate from the

issuer.  is certifi cate can be sold to another investor much
like shares.
In some ways, a bond is similar to a bank loan.  e issuer
pays the bondholder an agreed interest rate. Usually interest
is paid in equal amounts (called coupons) throughout the life
of the bond.  e bond is for an agreed term which is always
more than one year
2
. At the end of the term, the issuer pays
the amount borrowed back to the bondholder.
Key Features of Bonds
Let’s take a look at some of the key features of bonds. To help
you understand the basic terms, a diagram of a bond which
shows the diff erent cash outfl ows and infl ows for the issuer is
presented below.

Why Does a Business Borrow?
Businesses need to raise money from time to time to
expand or to fi nance their day-to-day operations. Issuing
bonds is one way to do this. Other options include
borrowing from a bank or raising capital by issuing shares
to investors. The latter is called equity.
1
For simplicity, we refer to “businesses” issuing bonds.
These businesses could be companies, institutions
(including statutory authorities and town councils) and
Government. Recent examples of issuers in Fiji are Fijian
Holdings Ltd, Fiji Pine Ltd, the Housing Authority and the
Fiji Development Bank.
2

A bill is an example of a fi xed income security with a term
of 1 year or less. Apart from the term, bonds and bills are
very similar.
Receive $100
(Price)
Pay $6
Coupon
Pay $6
Coupon
Pay $6
Coupon
Pay $6
Coupon
Pay $6
Coupon
Pay $100
(Face Value
Today
Year 1
Year 2
Year 3
Year 4
Year 5
Bondholder
Issuer
Pay regular coupons
Repay amount
borrowed at expiry
of bond
Lend money

by buying
bonds
E.g. company, institution, Government
Bond Example
In this example, the price of the bond is $100.  e bondholder
is lending $100 to the issuer.
 e bond has a term of 5 years.  is is the life of the bond.
 e face value is $100.  is is the amount the investor receives
at the end of 5 years.
 e coupon rate is 6% paid each year.  is is the interest rate.
 e bondholder receives a $6 coupon at the end of each year.
Bonds
Bonds belong to a class of investments called fi xed income
securities. Other examples are bills and notes.
Fixed income securities are like contracts where
the investor lends money to a business for an agreed
interest rate and period. Interest is usually paid in regular
installments.
A G u i d e t o I s s u i n g B o n d s
principal repayments to hundreds of bondholders as well
as maintaining all records.
n
Disclosure requirements – Where bonds are issued to
the public, detailed disclosure requirements are set by the
CMDA and other regulatory authorities.  is compares
with a bank loan where details can be kept confi dential.
n
Tax implications – Bond coupons are generally taxed
as income to the shareholder. In contrast, for example,
dividends on listed shares are tax-free. In this case, the

issuer may have to increase the yield on the bond to
compensate bondholders for tax and ensure its bonds
remain attractive.
Understanding Bond Price
What drives the price of a bond? Understanding this will
help you structure a successful bond issue that meets investors’
expectations. As a fi rst step, we look at the concept of “time
value of money”.
As mentioned earlier, a bond’s price can be higher or lower
than its par value. So after a bond is issued, how much will it
buy or sell for? Unfortunately, valuing a bond is not easy and
is beyond the scope of this introductory booklet. However,
this section tries to give you a basic understanding of what
determines the value of a bond. Further information can be
found in the appendix. Please consult your investment adviser
for specifi c advice.
Basic Concepts

n
Why do you buy a car? For most people, it is because they
get the benefi t of having their own means of transport.
Similarly, people invest in a bond because of what they will
get out of it, namely income and capital growth.
n
It follows that the value of a bond should refl ect the income
and growth it is expected to give the bondholder in future.
In other words, a bond can be viewed as simply a stream
of cashfl ows which includes the initial price paid by the
bondholder and the coupons and payment of face value
received by the bondholder.

Time Value of Money
5

However, valuing a bond does not simply mean forecasting
and adding up all future income and capital growth because
Are Bonds Suitable for your Organisation?
Bonds are just one of several funding options that you can
consider. But are they suitable for your business? Here are
some general characteristics of businesses that might be suited
to issuing bonds:
a Good credit quality – Poor credit quality means higher
returns are needed to compensate the investor for higher
risk and therefore issuing bonds will be more expensive.
In addition, because issuers with poor credit are likely to
be struggling with cashfl ows, debt may not be a good
idea because the issuer is legally required to make
regular payments regardless of how well or poorly it is
performing.
a Relatively large size – Investors are likely to be more
comfortable with large businesses that have extensive
resources.
a Good fi nancial record – A profi table business is more
attractive for investors.
a Public profi le – An established business with a good public
profi le will probably fi nd it easier to attract investors than
a new, less-known business.
a Relatively stable earnings – Bonds involve legally-
enforceable payment obligations, regardless of whether
the issuer is profi table or not. Issuers with unstable
earnings risk defaulting on payments in bad earnings years

which could lead to legal proceedings against it by the
bondholders.
a Relatively low debt – Remember that debt increases
fi nancial risk. As a general rule, a business should choose
a level of debt versus equity that (a) takes advantage of
leverage but (b) does not blow out its risk.
a Large borrowing requirement – The fi xed cost of issuing
bonds (e.g. prospectus, trust deed, legal and accounting
advice, etc) is signifi cant. Therefore small issues may not
be cost effective.
a Receptive to public scrutiny – Under the law, an issuer
making a public offer of bonds, shares or other securities
must regularly report material information to the public.
Benefi ts
Source of capital
Leverage
Delayed Interest
Delayed Principal
Fixed Interest Rate
Flexibility
Risks
Financial risk
Refi nancing risk
Bullet payment
Admin cost
Disclosure
Tax
5
See the appendix for a more detailed discussion of time
value of money and bond values.

rate of return. We will discuss this further in Understanding
Bond Price.
Security – An issuer may “secure” the bond on some of its
assets, like property or shares that it owns.  us if the issuer
defaults in paying bondholders, the bondholders will have the
rights to the proceeds from the sale of the assets. Security for a
bond reduces the risk to the bondholders and therefore makes
the bond more attractive to investors. Generally however bonds
rank behind loans from banks in priority for payment, but
ahead of ordinary trade creditors.
Why Issue Bonds?
Bonds off er a business a number of benefi ts. Some of them are
listed below:
n
An alternative source of capital – In Fiji, businesses have
traditionally relied on shareholders’ equity and bank loans
Alternative sources of funds like bonds mean that businesses
have a wider choice and more fl exibility in funding.
n
Leverage – Borrowing can increase shareholder returns.
Let’s say you build a new factory and fi nance this through
a mix of borrowing and equity. If you can borrow at an
interest rate that is lower than the return from the factory,
the return to shareholders will increase.  is is called
leverage. Bonds can be one method of leverage.
n
Less frequent payments – Coupons are typically paid
every three, six or twelve months, depending on the bond.
 is may be more fl exible and convenient for the issuer
compared to a bank loan which requires monthly interest

payments. A bullet bond goes even further by paying all
coupons and principal at maturity.
n
Delayed principal repayment – Compared to the typical
bank loan which requires that the principal is repaid in
installments, the bond principal is paid as a lump sum
on maturity. A zero coupon goes even further.  is type
of bond is issued at a discount to its face value and pays
no coupons.  e net present value of the diff erence between
the face and the issue price is the internal rate of return which
compensates investors for not getting coupons during the life
of the bond with a big capital gain at maturity.
n
Fixed interest rate –  e interest rates can be fi xed by
issuing a fi xed rate bond. In this way, if interest rates
increased, the issuer has locked in its interest rate.
n
Flexibility – Bonds can be structured in many ways, to suit
the needs of the issuer. For example, the issuer can choose
how often coupons are paid, the term, whether the coupon
rate is fi xed or fl oating and the type of embedded options.
Risks and Challenges of Issuing Bonds
n
Financial risk – Because bonds are a debt, the issuer has
payment obligations that are enforceable under law. Even if
the issuer runs into fi nancial diffi culty, coupons and principal
payments must still be made. Compare this with ordinary
shares – a company can decide not to pay dividends in years
where it makes a loss.
n

Refi nancing risk – When bonds mature the issuer still
needs capital, it may have to refi nance i.e. pay off the bonds
and fi nd new capital to replace the funds paid out. However,
refi nancing could be a problem if interest rates have been
rising – the issuer might end up refi nancing at a higher
interest rate.
n
Large bullet payment –  e principal is paid when bonds
mature. While delaying this payment may be convenient
initially, it means the issuer will have to make a large “bullet”
payment when the bonds mature.  e issuer needs to plan
its cashfl ows carefully so it isn’t caught unprepared.
n
Administration cost – Administration of a large pool of
investors would be more work compared to say borrowing
from a bank. Imagine sending out coupon cheques and
Leverage Example
Crash Co needs $100,000 for a manufacturing operation
that will generate a 10% rate of return after a year (i.e.
$10,000).
If shareholders provide all the funds, they get a 10% rate of
return ($10,000). However if 50% of the funds is borrowed
at a 5% interest rate (i.e. interest = 5% x $50,000 = $2,500),
the shareholders get the remaining return of $7,500 on
their equity of $50,000. Their return in this case is 15%
($7,500/$50,000).
With leverage, the shareholders’ return is now higher
because the interest on debt is lower than the return on
the project.
Leverage vs Financial Risk

Note that fi nancial risk should be weighed against the benefi ts
of leverage. More debt increases the benefi ts of leverage
but also increases fi nancial risk. Therefore businesses usually
look for a balance between the two i.e. take on some debt
but not too much!
4
A G u i d e t o I s s u i n g B o n d s
How to Value a Bond?
So what does all of this jargon mean? How do you actually go
about valuing a bond? Unfortunately, valuing a bond can be
quite complex and is beyond the scope of this booklet. However,
here are a few pointers:
n
Government bonds - the Reserve Bank regularly publishes
information on yields and prices for diff erent maturities and
coupon rates.  is information refl ects recent bond issues
and therefore provides an indication of the current value of
a Government bond.
n
Non-Government bonds - Corporate and other non-
Government bonds are generally riskier than Government
bonds so should really be giving you a higher yield than that
of a similar Government bond.  e yield can be estimated
by adding a premium on the equivalent Government bond
yield to refl ect the extra incremental risk.  e resulting
yield can then be used to calculate the bond’s value i.e. the
present value of the bond’s future cashfl ows.
Estimating the amount of premium to add is not straightforward
and is best left to your investment adviser.  is premium will
vary from issuer to issuer.  e higher the overall risk of a

bond compared to a similar Government bond, the larger this
premium.
Structuring Bonds – Practical Issues
Structuring a bond issue normally requires specialist investment
advice and is outside the scope of this introductory booklet.
However, in this section we discuss some practical issues that
will help you when working with your investment adviser.
Leverage
Remember, debt can increase the return on equity through
leverage. However, with more debt, a business’s fi nancial risk
increases because regardless of whether the business is making
profi ts or losses, it is locked into legally-enforceable payment
obligations. It is therefore important to strike a balance.
Usually a business will have a target capital structure, e.g. “50%
equity/50% debt”.  is will determine how much capital
should be raised through a bond issue.

Determining an ideal capital structure depends on the individual
business, its industry and other factors, beyond the scope of this
booklet. As a rough guide, a business with stable earnings from
its operations will be better able to meet its debt obligations.
Term
 e term of a bond depends on the reasons for raising capital and
the expected cashfl ows that will be available to meet payments.
For example, a large project might be funded with a ten-year
bond issue to allow enough cashfl ows to be generated to pay
off the bonds. Alternatively the issuer may choose to fund this
through a 5-year bond issue and refi nance with a second 5-year
issue when the fi rst lot of bonds mature. Various combinations
are possible. Please consult your investment adviser.

Credit Spread, Yield and the Coupon Rate
We have seen how government bonds are often regarded as
low risk or risk free, because government is seen as unlikely to
default on its payments.
 erefore, the yield on government bonds will normally be
the lowest in the market. Remember the lower/higher the
risk, the lower/higher the return (yield) has to be in order to
compensate investors.
Risk Premium and the Coupon Rate
In theory, as the required yield increases, the issuer will have
to increase the coupon rate or else the price investors are
willing to pay will fall. Issuers normally don’t want the latter
because this could mean that they raise less money than
planned i.e. investors are paying less for the same number
of bonds.
Therefore in practice, issuers will aim to keep the bond price
at the face value. They do this by setting the coupon rate at
the required yield. In MRC’s example, the coupon rate is 8%.
Determining the appropriate yield can be done through an
auction process.
Example
Max Risk Co (MRC) wants to issue a 10 year bond with a
$100 face value and a callable option. MRC is a medium-
sized public company which has been profi table except for
the last 2 years when it made a small loss. It expects to
return to profi tability this year.
MRC’s bonds are riskier than government bonds because
MRC has less resources, has earnings which have fl uctuated
in recent years and has a callable option.
10-year government bonds have a yield of 6%. In this case,

MRC’s bonds might end up with an 8% yield.
you need to take into account what is called the “time value” of
money.
Consider the following: Which would you rather have: $100
today or $100 in a year’s time?  e logical choice is $100 today
because you can invest this to earn interest so that in a year’s
time, your initial investment will be worth more than $100.
For example, if you could invest to yield 10% for the year, a
$100 investment today would be worth $110 after one year.
Reversing this process, $110 in a year’s time would be worth
$100 today
6
. To use the technical jargon, at an interest rate or
yield of 10%, present value of $100 is equal to future value of
$110.
 is concept has some important implications for bond value:
n
Because you can invest at some interest rate, $100 today
should be worth more than $100 in one year’s time (this
is true of any amount and interest rate for that matter).
Similarly, $100 in one year’s time should be worth less than
$100 today
7
.
n
 e higher the interest rate the greater the diff erence
between present value and future value. Say you invest for
a year at a 20% interest rate. A present value of $100 would
be equal to a future value of $120 and vice versa.
n

So what is the value of a bond? It is basically the present
value of the future cashfl ows (income and growth) that the
bondholder will receive.
How Interest Rates Aff ect a Bond’s Value?

As we have seen, interest rates aff ect a bond’s value.  e bond
price may be higher or lower than its face value depending on
how its interest rate (the coupon rate) compares with interest
rates available on other investments.
Take a bond with a fi xed coupon rate
8
of 6%.  e coupon rate
never changes even though interest rates may. Let’s say when
the bond is fi rst issued, similar bonds and other investments
were also paying 6%.  erefore the bond’s coupon rate is in
line with the market and its price will be equal to its face value.
 is bond is said to be trading at par.
What happens if the market interest rate dropped to 4%?
Now the bond is still paying 6% so is more attractive than
other investments paying only 4%. Investors will be willing
to pay more for this bond.  is is why a bond’s price can be
higher than its face value.  is bond is said to be trading at a
premium.
What happens if market interest rates increased to 8%?  e
bond is still paying 6% so is now less attractive than other
investments paying 8%. Investors will want to pay less for this
bond.  is is why a bond’s price can be lower than its face
value.  is bond is said to be trading at a discount.
To summarise, a bond’s value (i.e. its price) and the interest
rates in the market are like a see-saw. As one goes up, the other

goes down. An increase in interest rate leads to a fall in bond
price and vice-versa.
Which Interest Rate?
In our simple example below, we used a 10% interest rate. What
is the relevant interest rate for analysing a bond? Basically
this should be the interest rate available on other investments
that are similar to the bond (this is referred to as the market
yield). Why is this so? Because if an investor didn’t choose the
bond, he/she could get this yield (interest rate) from similar
investments anyway.
 erefore the market yield is like the benchmark to measure
a bond against. If the bond’s coupon rate isn’t as high as the
market yield, investors will pay less than the face value.
If the coupon rate is above the market yield, the bond is more
attractive and investors will be prepared to pay more than the
face value.
6
Future Value = $100 x 1.10 = $110 i.e. $100 today is
worth $110 in a year. Present value of $110 to be received
in a year = $110/1.10 = $100 i.e. $110 in a year is worth
$100 today. It follows that $100 to be received in a year is
worth less than $100 today!
7
With a 10% interest rate, this is worth $100/1.1 =
$90.90.
8
When the bond is fi rst issued, the issuer tries to set a
coupon rate that is competitive with similar bonds. Too
high and the issuer ends up paying too much interest, too
low and investors might not be attracted.

6
General
Interest
Rates
Bond
value
General interest rates increase but bond coupon rate stays
the same the bond is now LESS attractive relative to
other investments
Investors are prepared to
pay LESS for the same
bond
A G u i d e t o I s s u i n g B o n d s
n
Managing coupon and face value payments, including
mailing out cheques or depositing payments into
bondholder accounts.
n
Keeping track of sales of bonds in the secondary market.
n
Ensuring all records are up to date.
 e Reserve Bank of Fiji currently carries out administration
of Government bond issues. For other bond issues, the issuer
may prefer to do this in-house or enter into an agreement for
a third party, such as the RBF, to carry out these tasks on the
issuer’s behalf.

Tax Implications
 e taxation of bonds diff ers from shares because bonds are
generally treated as debt.

 e following diagram summarises the general tax treatment
of bonds compared with shares.
A key implication is that bondholders pay tax on coupons
while shareholders can be tax-exempt.  e issuer may have to
increase the yield on the bond to compensate bondholders for
tax and ensure bonds remain attractive.
Sinking Fund
One of the risks of bonds is that the issuer will have to make a
large payment of face value when the bond matures. Planning
for this is important to avoid a cash crisis. Companies with
strong cashfl ows and large cash reserves may not have to
worry. For others, a sinking fund, where money is set aside
in installments to meet principal repayments, may be a wise
move.
A sinking fund is basically like amortising a bank loan over
time.  is reduces credit risk and therefore, may reduce the
yield demanded by bondholders. However, a sinking fund ties
up cashfl ow over the bond’s term.
The Bond Issue Process
Basic Requirements
 is section deals mainly with issues of bonds to the public, as
opposed to private placements. In general, private placements
to selected institutions and other investors (without a general
off er to the public) are treated as a private transaction, subject
to what is agreed between the parties. In contrast, issues to the
public must meet strict requirements set by the CMDA.
Public issues must be approved beforehand by the CMDA.
 is requires that a proposal be made to the CMDA. Once
the proposal is approved, key steps in the bond issue are:
n

Preparation of a prospectus, which provides detailed
information for the benefi t of investors.
n
Appointment of a trustee to represent the interests of the
bondholders.  e relationship between the trustee and
issuer is governed by a document called the trust deed.
A trustee is required by law and is usually a company
specialising in providing trustee services.
n
Appointment of a registrar to handle the administration of
the bond issue.  e registry function may be carried out by
the issuer or outsourced to a third party.
n
Conversion to a non-private company where applicable
– By defi nition in the Companies Act, a private company
cannot off er shares or bonds to the public.  erefore to
carry out a public off er, a private company must convert to a
non-private (“public”) company.
n
Application for stock exchange quotation – If it is decided
to quote the bonds on the stock exchange, application needs
to be made to the stock exchange.
n
Appointment of underwriters and sub-underwriters.
n
Roadshow to key institutions and other investors to build
demand for bonds.
n
Running of the off er period.
n

Auction process and allotment of bonds (see below).
As a very basic guide, a typical bond issue could take around 12
weeks to complete. A conceptual timeline for a public issue of
bonds is presented. In practice this will depend on the particular
issue.
Bonds
n
Coupons are paid out of
income
n
Coupons are tax-deductible
n
Coupons = interest income
to bondholder
n
Bondholder is taxed
regardless of whether tax is
paid at company level
Shares
n
Dividends are paid out of
profi ts
n
Listed company dividends are
tax free
n
Inter-company dividends are
tax free
n
Shareholder is not taxed to

the extent that tax is paid at
company level
 e yield on non-government bond issues will depend on the
risk of those bonds compared to the equivalent government
bond.  e diff erence between a bond’s yield and the yield on
a similar government bond is called the credit spread or risk
premium. Factors that determine the risk premium include:
n
Management quality and performance record of the issuer;
n
Financial, operating and competitive position of the issuer;
n
Structure and ownership of the issuer;
n
 e value and quality of assets off ered as security;
n
Constraints imposed on the borrower (e.g. maximum debt
levels, which reduce risk for the bond-holder); and
n
Embedded options. Note that some embedded options
(e.g. a convertible option) are valuable to a bondholder while
others (e.g. a callable option) increases a bondholder’s risk.
 is callable option may also be seen by the bondholders as
a sign of confi dence in the issuer’s operations.
Security and Other Enhancements
Providing security reduces the risk for investors and the cost
to the issuer through a lower required yield.  is is especially
important where the issuer might have a poor credit rating.
Examples of security include:
n

Real property - fi xed assets, land; and
n
Collateral – shares, and bonds owned by the issuer.
Bonds can be made less risky in other ways, for example:
n
A guarantee provided by a third party; and
n
A bank letter of credit.
Underwriting
A bond issuer may consider having the issue underwritten.
In an underwriting, the underwriter, usually a company,
institution or wealthy individual, promises to take part or all
of the shortfall bonds that are not demanded by investors.  e
issue may also be sub-underwritten by other parties.  is helps
spread underwriting risk and is especially important when an
issue is too large for the underwriters.
 e advantages of underwriting include the following:
n
Reduces risk for the issuer by ensuring that a minimum
amount of capital will be raised;
n
Ensures that the bond issue is seen as a success by the
markets;
n
Helps to stimulate demand in the secondary market; and
n
 e underwriter typically helps the issuer in pricing and
marketing the issue.
Registration
Just like shares issued to the public, a bond issue requires

careful administration to ensure that the issuer meets all its
payment and other obligations on time.
Some of the common administrative tasks include:
n
Receipt of applications and payment when bonds are
issued.
n
Running the auction process to determine the appropriate
yields and allotting bonds to successful applicants.
8
Other Special Features
Bonds provide the issuer with considerable fl exibility in
designing the features of the bond. We have discussed some
of the main options above. Here are just some of the other
features that could be considered:
n
Floating coupon rate – This allows the coupon rate to
increase or decrease depending on how interest rates
in the markets move. In this way, bondholders can be
protected against interest rate movements that could
devalue their bonds.
n
Bullet payment – Some bonds can be structured to
delay payment of interest until maturity.
n
Call provision – This allows the issuer to repay bonds
early if this is advantageous to the issuer. For example,
when interest rates are falling, the issuer could repay
bonds and refi nance at a lower interest rate.
This list is not exhaustive. Talk to your investment adviser

about other bond features that might be suitable for your
business.
Administration is sometimes referred to as the registry
function and the party carrying out this function is called the
registrar.
A G u i d e t o I s s u i n g B o n d s
 e prospectuses must be approved by the CMDA and
registered with the Companies Offi ce. e purpose of the
prospectus is to help investors make informed investment
decisions before they decide to invest. e prospectus will have
attached the application form and instructions for completing
an application.
Tender and Allocation Process
Bonds are generally issued through an auction process. In
such a process, investors submit tenders for the bonds and
this allows the issuer to determine what the appropriate yield
and coupon rate should be. Some of the common methods of
issuing bonds are shown in the diagram below.
The South Pacifi c Stock Exchange
The SPSE is currently the only stock exchange in Fiji.
Trading sessions are held on weekdays at 10:30am
where matching buy and sell orders are transacted.
Trades are settled within T + 3 working days. At this
time, the buyer receives the bond certifi cate(s) and the
seller receives payment.
Having an auction process provides a number of advantages.
For example, the bond issue more accurately refl ects market
demand and is more transparent. Competition can also result
in more competitive terms for the issuer.
Once tenders are received, successful bidders are chosen

according to set criteria, typically based on yield. Common
approaches include the following:
n
Single Price (“Dutch auction”) – Here, competitive bids
are ranked from the lowest to the highest yield (note that
higher yield means lower price). Starting with the lowest
yield and working up, the yield at which the quantity
off ered for sale equals the quantity demanded is identifi ed.
 is yield is called the “stop yield”). All competitive and
noncompetitive bids are fi lled at the price implied by
the stop yield. Sometimes there may be more quantity
demanded than is available. In this case, bonds may have to
be pro-rated.
n
Multiple Price – Here, quantity is allocated at the yield
demanded, starting from lowest to highest until the
supply of bonds is fully allocated. In other words, each
group of bidders is paid a diff erent price. Where both
non-competitive bids are accepted, they typically receive a
weighted average of the competitive yields accepted.
Successful tenderers are then issued with a bond certifi cate(s)
as proof of ownership.
Listing and Trading Bonds on the SPSE
Bonds can be bought and sold in the secondary market either
directly between buyer and seller or using a broker as a “go-
between”.
One of the options for trading bonds is the stock exchange,
where bonds can be traded just like shares. To trade bonds
on the stock exchange, the issuer must quote its bonds on the
Non-Competitive Auction

Under this method, investors apply
for quantity or dollar amount of
the bonds they want to purchase.
The price is assigned based on the
outcome of the competitive bids.
Competitive Auction
Under this method,
investors specify both
the quantity of the bonds
demanded and the price
they are willing to pay.
Dual Auction
Here both competitive
(price and quantity) and
non-competitive (quantity
only) bids are allowed.
Primary Market vs Secondary Market
The bond market can be viewed as two markets:
Primary Market - Created when a company fi rst offers
bonds to the public. A company seeking to raise funds by
issuing bonds must publish a prospectus offering investors
the opportunity to buy. Investors would fi rst evaluate the
prospectus before subscribing for bonds.
Secondary Market – Where existing bonds are traded.
Bonds in Fiji may be traded in the secondary market directly
between bondholders or through an intermediary, called a
broker. Brokers must be licensed by the CMDA.
Your investment adviser will be able to help you plan and
implement a bond issue in a timely and cost eff ective manner.
Other legislation and regulations that need to be considered

1. Companies Act
Certain sections of the Companies Act 1985 need to be
complied with prior to issuing bonds to the public.  ese
sections outline basic requirements for prospectuses,
allotment and special provisions, etc.  e key sections to
keep in mind fall under Part III of the Companies Act i.e.,
Share Capital and Debentures.
2. Income Tax Act
Specifi c binding tax rulings may need to be obtained by
issuers for their specifi c circumstances. Specifi cally, treatment
of income from interest payments to bondholders, whether
it is taxable in their hands or the interest withholding tax
needs to be deducted at source as a statutory obligation from
the interest paid to the non-resident bondholders (if any)
needs to be clearly documented. If an organisation intends
to raise capital outside of Fiji, risks such as foreign exchange
risk needs to be addressed together with any impacts on the
resultant tax situation arising from any realised or unrealised
gains/losses.
3. South Pacifi c Stock Exchange Listing Rules
If the issuer intends to quote the bonds on the South Pacifi c
Stock Exchange (“SPSE”) for day-to-day trading then
the SPSE Listing Rules (“LR”) has to be complied with
including the payment of SPSE fees and charges.  e LR
impose strict obligations on companies and non-compliance
could result in being disqualifi ed from the offi cial list and
loss of offi cial quotations for their bonds.
4. Trustee Act
Similar to unit trusts, a trustee has to be appointed to
represent the interests of the bondholders.  ere must be

a trust deed which sets out the relationship between the
issuer and the trustee holding the principles outlined in the
Trustee Act 1966.
5. Company’s Articles of Association
 e Articles of Association has to be checked to ascertain
whether the directors of the company are empowered to
issue bonds and raise money from the public. If this is
not possible, amendments may be required to the Articles
of Association to allow for the capital raising through the
bond instrument.
6. Foreign Investment Act
Off shore investors have to obtain approval from the Fiji
Islands Trade and Investment Bureau (“FTIB”) to invest
in Fiji. Bond issuers have to bear in mind the Foreign
Investment Regulations 2005 that states the minimum
percentage ownership that needs to be retained for certain
industries by local residents.  e remaining percentage
could then be off ered to off shore investors buying bonds
which have provisions of conversion to equity or other
embedded options that could deem the instruments as
equity or quasi-equity.
7. Reserve Bank of Fiji Act
Reserve Bank of Fiji exchange control approval has to be
obtained for any off shore investors interested in investing
in bonds issued in Fiji.
Please note that the above key legislation are in no way an
exhaustive list. Professional advice needs to be considered on
a case by case basis.
Primary and Secondary Markets
When bonds are fi rst issued, this is done in the primary

market.
Bonds can be issued just to a selected group of investors,
usually large institutions and companies (this is called a
private placement). Where bonds are off ered to the public
(a public off er), various laws apply, including the Capital
Markets Development Authority Act and associated rules and
regulations.
One of the most important requirements is that the issuer must
prepare and make available to investors a document called a
prospectus.  e prospectus sets out detailed information on
the issuer, including its history, operations, resources, fi nancial
performance, how the funds being raised will be used, how to
apply for bonds and whether there is any minimum amount
that must be applied for.
10
Phase 1
Phase 2
Phase 3
1 2 3 4 5 6 7 8 9 10 11 12
Week
Plan, budget,
structure
Prospectus and
other regulatory
requirements
Registration, book
building, auction and
allotment
Conceptual Timeline
A G u i d e t o I s s u i n g B o n d s

Valuing a Bond
Conceptually, the value of a bond is the net present value of its
cashfl ows:
Price = C1 +C2 + + P + Cn
(1+r)1 (1+r)2 (1+r)n
Where:
C1 = Annual coupon in year 1
C2 = Annual coupon in year 2
Cn = Annual coupon in year n
P = Principal repaid in year n
r = market interest rate for bond with term of n years
In reality valuing a bond is a little more complicated because of
several special factors. For example, accrued dividends mean
that the basic bond price will fl uctuate over time.  e pricing
formula used by the Reserve Bank of Fiji for valuing bonds is
as follows:
P = C/2 x A + FV
- (n + k)
Where:
P = price per $100 face value
C = coupon (assumes coupons are paid semi-annually)
A = 1 - (1 + i/2)
- (n + k)

i/2
F = face value
V = (1 + i/2)
n = number of whole half years to maturity
k = f/d where: f = actual number of days from
settlement date to next coupon date

d = actual number of days in that half
year coupon period
i = current yield to maturity or rate of return.
Appendix
Bond Valuation Mathematics
Future Value (FV) – this is the value which an amount today
will grow to if it earns interest.
= Present Value x (1+r)
n
, where n = number of periods in
which interest is earned.
Present Value (PV) – this is the value today of a future
amount assuming an interest rate. PV is the reverse of FV.
= Future Value ÷ (1+r)
n
where n = number of periods in
which interest is earned.
Net Present Value (NPV) - NPV is the value today of all
current and future cashfl ows. It refl ects time value of money
using the basic PV formula above. Obviously, a dollar today
has a present value of $1. However, future cashfl ows are
discounted by a market interest rate (or what is often called
a discount factor) to take into account the fact that future
amounts are worth less today.  e formula for calculating a
stream of cashfl ows is:
NPV = -C
0
+ C
1
+ C

2
+ + C
n
(1+r)
1
(1+r)
2
(1+r)
n
Where:
-C
0
= cashfl ow in year 0 (now)
C
1
= cashfl ow in year 1
C
2
= cashfl ow in year 2
C
n
= cashfl ow in year n
r = market interest rate
n = last year of cashfl ow stream
NPV Example
Consider the following cashfl ows from an investment:
What is the Net Present Value if the market interest rate
is 5%?
NPV
= -100 + 10 + 10 + 110

(1+0.05)
1
(1+0.05)
2
(1+0.05)
3

= -100 + 10 + 10 + 110
1.05 1.1025 1.157625
= -100 + 9.5238 + 9.0703 + 95.0221
= $13.62
Future Value Example
Calculate FV of $300 invested for 10 years if it earns 8% a
year.
FV = 300 X (1+ 0.08)
10
= $647.68
Present Value Example
Calculate PV of $1000 to be received in 5 years assuming
a discount rate (interest rate) of 9%.
PV = 1000/ (1+ 0.09)
5
= $649.93
Year 0 = -$100 (i.e. invest $100);
Year 1 = $10;
Year 2 = $10;
Year 3 = $110
Exchange.  is requires an application for quotation to be
made by the issuer and may be subject to quotation fees.
Listing bonds on the stock exchange off ers several benefi ts

including:
n
Liquidity and marketability of bonds
n
A mechanism for shareholders to sell their shares
n
Enhanced prestige and corporate profi le
n
Enhanced value
12
Under the Capital Markets Development Authority Act,
investors must use a broker licensed by the CMDA when
buying or selling bonds on a stock exchange.  e broker
follows the client’s instructions in taking the order to the stock
exchange, including the quantity to be traded, price, or range of
prices, to trade at, and the length of time for which the order
is valid. In return for its services, the broker may charge a
small fee which includes the broker’s commission and SPSE
and CMDA levies.
A G u i d e t o I s s u i n g B o n d s
How Interest Rates Aff ect Bond Prices – Examples
Say you buy a $1,000 bond when it is issued in the primary
market.  e bond has a coupon rate of 10% and a maturity of
10 years.  erefore, each year for the next ten years, you will
receive an annual coupon of $100 (i.e. 10% x $1,000). At the
end of 10 years, the $1,000 you lent is repaid to you.
To see how interest rates aff ect the price of bonds, say you decide
to sell the bonds after 4 years. Let’s look at two scenarios: (1)
interest rates have risen and (2) interest rates have fallen.
Scenario 1 - Interest rates rise

Interest rates have risen and investors are now looking for a
12% coupon rate on similar bonds.
 is means the market value of your bonds must be at a level
where a buyer earns at least 12%.  e bond will continue to
pay $100 annual coupons. But since the buyer requires a return
of 12%, he will pay you less than the par value of $1,000.
Using the bond price formula, the price of the bond is $917.
 e buyer will receive $100 coupons each year plus a principal
repayment of $1,000 in the sixth year when the bond matures.
 e $100 per year plus the gain of $83 (1,000 face value – 917)
equals a 12% per annum yield on the initial $917 invested by
the new investor.
As the original bondholder, you will incur a capital loss on your
investment.
Scenario 2 - Interest rates fall
Now assume that interest rates have fallen and investors are
now seeking a coupon rate of 8% on similar bonds.
You would require the buyer to pay a price that yields a return
equal to the current market rate of 8%. Because the bond pays
an annual coupon of 10% (higher than the current market rate
of 8%), the bond price should be higher than the original price
you paid.
Using the bond formula, the buyer will have to pay you $1,092
for the bond, which would yield him a return of 8%.  is is
equivalent to the current market rate. You therefore make a
capital gain of $92.
 e examples illustrate that during the life of a bond, its capital
value can change at any time in line with changes in the overall
level of market interest rates.  is is the risk that investors
trading in the secondary market face. In contrast, investors

who hold the bonds to maturity are guaranteed that they will
be repaid the par value of the bonds when the bond matures.
A Bond Valuation Example
A bondholder wishes to sell the following bond in the
secondary market:
Coupon = 9% = $9 (paid in semi-annual
amounts of $4.50)
Face Value = $100.00
Maturity date = 14 February 2006
Settlement date = 30 September 2003
Last coupon date = 14 August 2003
Next coupon date = 14 February 2004
i = 6.75%
n = 4
f = 30/09/03 to 14/02/04 = 137 days
d = 14/08/03 to 14/02/04 = 184 days
Price = 9/2 x 1 - (1+0.0675/2)
- (4+0.74457)
0.0675/2
+ 100 x (1 + 0.0675/2)
- (4+0.74457)
= 4.5 x 0.14571/0.033750 +100(0.85429)
= 4.5 x 4.31737 + 85.42900
= $104.86
* Please consult your investment adviser or broker for
specifi c advice on valuing a bond.
Clean vs Dirty Price
The RBF formula given above does not take into account the
interest accrued on the bond since the last coupon payment
date. For example, say you have a semi-annual coupon bond

and the last coupon payment was three months ago. If you
sold the bond today you should be entitled to half of the next
coupon (3 months out of the 6 months). Where the price
includes this accrued interest, it is called the dirty price.
Normally bonds are quoted without accrued interest. This is
called the clean price. To calculate the dirty price, the accrued
interest is added to the clean price. The formula for accrued
interest (A1) is:
A1 = number of days from last coupon payment date to settlement date
number of days in coupon period
Dirty Price
Continuing with our bond example, the calculation of the
clean price is as follows:
A1 period = 47 days/184 days = 0.25543
A1 = 0.25543 x $4.50 = $1.15
Dirty price = Clean price + A1
= $104.86 + $1.15
= $106.01

Glossary
Accrued Interest an amount of interest accumulated, but not yet paid, between semi-annual payment dates
Auction usual method of issuing bonds where investors submit bids
Bondholder an investor in bonds
Call option type of embedded option which allows the issuer to pay back the bond early
Call provision some bonds notably perpetual securities have a call provision attached.  is gives the issuer
the right, but not the obligation, to buy back the bonds from investors at a particular point in
time at a certain price
Clean price Price that does not include the interest accrued since the last coupon payment
Competitive auction Auction method where investors apply for both the yield and the quantity they wish to purchase
Competitive bid a bid for bonds submitted under auction specifying both yield and quantity

Conversion rights type of embedded option, which gives a bondholder the option of converting his/her bondholding
into shares of the issuer
Coupon regular interest payments made to the bondholder
Coupon rate percentage of interest paid on a bond
Credit risk risk that the issuer may be unable to pay bondholders
Dirty price price that includes interest accrued since the last coupon payment
Distribution return  e return an investor gets from the dividends or realized capital gains from his investment
Diversifi cation spreading your money over diff erent investments to reduce overall risk
Dual auction combination of competitive and non-competitive auction methods
Embedded option option given to the issuer and/or the bondholder to take some action against the other party
under certain circumstances
Face value amount paid to the bondholder at the end of the lending period
Fixed coupon rate coupon rate, which does not change over the life of the bond
Fixed income securities class of investments which includes bonds issued by the government, statutory authorities
and companies. A typical feature is these securities make regular interest payments and repay the
principal on maturity
Floating coupon coupon rate that may be periodically adjusted to take into account prevailing market conditions
Future value value which an amount today will grow to in future if it earns interest
Growth return the return an investor gets from selling his investment at a
profi t i.e. for a higher price that he bought them
Income return a bondholder’s return from receiving regular coupons
Infl ation when the cost of a product or service rises and quality Remains the same; also when spending
increases relative to supply – think of it as too much chasing too few goods
14
A G u i d e t o I s s u i n g B o n d s
CMDA Educational Booklets
n
Investing in Shares
n
Investing in Unit Trusts

n
Investing in Bonds
n
Rewarding Employees
n
Using Employee Share Schemes - FAQ
n
Why You Should Invest - FAQ
n
Investing in Shares - FAQ
n
Choosing the Right Shares - FAQ
n
How to Use a Broker or Investment
Adviser - FAQ
n
Investing Wisely - FAQ
n
How to List Your Company on the
Local Stock Exchange
n
Vakatubu I Lavo e na Voli Sea
n
Vakatabu I Lavo ena “Unit Trusts”
If you wish to receive these free educational
booklets, please contact us:
Level 5, FNPF Place,
343-359 Victoria Parade,
Suva,
P.O. Box 2441,

Government Buildings,
Suva
Tel: (679) 3304 944
Fax: (679) 3312 021
Email: 
Website: www.cmda.com.
Interest rate risk risk that rising interest rates cause bond prices to fall
Issuer company or institution that issues a bond.  e issuer borrows money from bondholders
Liquidity risk risk that a bond cannot be easily sold at or close to its market value
Maturity see “Term”
Multiple price method of allocating bonds where successful competitive bids receive the tendered yield
Allocation while non-competitive bids receive a weighted average of competitive yields accepted
Net present value value today of all current and future cash fl ows
Non-competitive auction method where the yield of bonds is fi xed and investors only apply for the number
of bonds they want to purchase
Non-competitive bid a bid submitted under auction specifying only the quantity
Par value the face value of an investment set at the time of issue
Political risk risk that unexpected events adversely aff ect the value of a bond
Present value value today of a future amount assuming a specifi c rate of return
Price amount an investor pays for an investment
Primary market where an issuer fi rst off ers bonds to the public
Principal amount paid to the bondholder at the end of the lending period
Prospectus a formal off er document required by law which sets out detailed information on
the company that will help potential investors to analyze the investment
Re-investment risk risk that if interest rates fall, coupons would have to be re-invested at a lower interest rate
Secondary market trading in bonds or shares that have already been issued
Security assets of the issuer that may be sold to reimburse bondholders if the
issuer fails to meet its obligations
Single price method of allocating bonds where all bonds are issued at the highest
(“dutch auction”) accepted yield allocation tendered by investors

Term the life of a bond
Yield the return on investment usually expressed as a percentage of the initial investment
Yield to maturity type of “yield” which measures the rate of return on a bond assuming it is held to maturity


CapitalMarketsDevelopmentAuthority
P.O.Box2441,GovernmentBuildings,Level5,FNPFPlace,
343-359VictoriaParade,Suva,FijiIslands.Tel:(679)3304944Fax:(679)3312021
Email:Website:www.cmda.com.fj