5.2 Investment choices – Debt Instruments

Debt instruments (or fixed income securities) are financial instruments that issuers are called “The borrower or debtor” with a legal obligation to pay compensation in the form of interest as installments or other according to the instrument which is called the lenders or creditors. The maturity period of bonds will range from short-term (less than one year), medium term (one to five years) to long-term (over five years). In the case of debt capital market, it generally refers to one year or more of bond redemption. The buyer will receive compensation in the form of interest rate, discounts or other benefits received as a set.
Using the word “debt instrument” is to demonstrate the ability of holders to be transferable (Investors in debt), which differ from the contract loans which listed as “creditors” and “debtor” of the lender with a loan as well, but the loan contract can not change the “creditor” between the investors. Mechanism can be made through secondary market, currently is BEX (Bond Electronic Exchange) operated by the Stock Exchange of Thailand.
As defined above, it means that debt instrument is a type of financial instrument that enables the borrower and the lenders to bound compensation together by the regulations specified in the bond contract (indenture) as a common rules. Moreover, each bond is transferable in the secondary market like the shares trade on the Stock Exchange.
“Debt instrument” is a broad term, but you might rather be familiar with the “bonds” or “debentures”, the “bond” is often used to call the bond debt issued by governments or state enterprises, and the “debentures” is often called when issued by a private company. But in other countries, “Bond” is used for general debt issued by public and private. In some cases the “Debenture” is used when the debt has no collateral.
1. Par value
Means the amount the borrower must pay back the bond holder that when due, such as 1,000 Baht or 10,000 Baht
2. Coupon rate
The interest rate that the issuers have an obligation to be paid to the holders of dept instruments according to the interest rate pays in installments which is defined throughout the dept period.
3. Installments of interest (Coupon frequency)
Number of interest payments per year depending on requirements, such as defining to pay interest every semi-annual, etc.
4. Expiry date or Maturity date.
Means the expiry date of the bond, the issuer must replay the principal and final interest (if any) to shareholders.
5. Issue
Issue is the debt instrument issuer which has status of the borrower or debtor.
6. The type of debt instrument.
Mean the information that specifies the type of debt instrument, such as unsecured debentures, subordinated / not subordinated, convertible debentures, etc.
7. Covenants
Mean that the conditions that the issuer must comply with or refrain from such as do not pay dividends to the shareholders which exceeding the defined rate, maintain debt to equity ratio to not over defined rate. Terms may include limitation on the administration of the merger, such as banning etc.

Debt instrument is classified as one way to invest, depending on the decision of the investors will be interested based on returns expected to be received and the level of risk that is acceptable. The reasons that investors choose to invest in the debt instrument are
1. A low risk investment compared to equities.
Because of the probable rate of returns, investors can estimate cash flow that they will receive in the future.
2. Stable and consistent returns.
Because of the bond coupon payments are determined in advanced.
3. A kind of financial instruments to reduce the risk of investment.
Since investment in equities can not certain estimate revenue from capital gain / loss, and normally debt instrument has low change in the price (volatility) than equity.
4. Supporting the secondary market (Marketability).
The trading is transferable, and if the instrument is issued by government and private companies with financial stability, it would make the bond liquidity.
5. Used as part of the assets held.
It makes liquidity for the banks or financial institutions according to law.
6. Can be used for other purposes.
For instance, used for guarantee the business, the accused, managing non-budgetary funds for the government such as section 5 and section 6 is the only case of government debt.

Tax-related investment
1. The right to claim (Priority Claim).
Debt instrument holders are in a high position for the right claim over equity holders as a business owner. If the company has financial problems or bankruptcy lawsuit, the company must sell by auction and liquidated by proceeding from the auction to pay back bond holders before the equity holders. Equity shareholders will receive payment when the company paid back the dept holders (creditors) is complete.
2. Ownership
Debt – debt holders are not eligible to vote in the meetings or decisions in the company operation, since they are the company’s creditors, not as the owners.
Equity shareholders have the right to vote in the meetings or decisions in the company operation as an owner.
3. Return
- Bond: bond yields almost the whole side of consistent cash flow in the period of interest.
- Equity: equity returns may irregularities in cash flow as dividends, which depending on profit and company policies.
4. Age of the instrument
Debt is a fixed period to be raised.
Equity age is unlimited.
- Income from interest withholding tax 15% and have the right to opt out the income tax calculation year-end.
- Earning from sales tax withholding 15% and have the right to opt out the income tax calculation year-end (excluding debt interest which tax withholding 15% only from the first holder).
- Income tax withholding discount 15% only from the first holder and have the right to opt out the income tax calculation year-end.