The market for corporate bonds

I. THEORY
1. Definition:
- The market for corporate bonds refers to the arena where companies issue debt
securities to investors in order to raise capital. Corporate bonds are essentially IOUs
issued by corporations to borrow money from investors, typically with the promise of
periodic interest payments (coupon payments) and the repayment of the principal
amount at maturity.
- In this market, various entities such as corporations, financial institutions, and
governments participate as both issuers and investors. Issuers offer bonds with
different terms, interest rates, and maturities to attract investors, while investors,
including individuals, institutions, and other corporations, buy these bonds as a means
of generating income or diversifying their investment portfolios.
- The corporate bond market is an integral part of the broader fixed-income market,
alongside government bonds, municipal bonds, and other debt securities. It plays a
crucial role in facilitating corporate financing and providing investors with
opportunities to earn returns through interest income and potential capital
appreciation. Additionally, the dynamics of the corporate bond market are influenced
by factors such as prevailing interest rates, credit ratings, economic conditions, and
issuer-specific factors.
2. The major types of corporate bonds:
- There are six major types of corporate bonds: Investment-grade bonds, High-yield
bonds, Convertible bonds, Callable bonds, Fixed-rate bonds and Floating-rate bonds:
This section explains the fundamentals of these six types of corporate bonds using
concrete examples of these instruments.
2.1 Investment-grade bonds
These bonds are issued by financially stable companies with high credit ratings. They
offer lower interest rates compared to riskier bonds but are considered safer
investments.
2.2 High-yield bonds (also know as junk bonds)
These bonds are issued by companies with lower credit ratings or higher risk of
default. They offer higher interest rates to compensate for the increased risk.
2.3 Convertible bonds
These bonds give investors the option to convert their bond holdings into a
predetermined number of the issuer's common stock shares at a specified conversion
price. They offer potential for capital appreciation if the issuer's stock price rises.
2.4 Callable bonds
Callable bonds give the issuer the right to redeem the bonds before maturity,
typically after a specified call date. This gives the issuer flexibility to refinance debt
at lower interest rates if market conditions become favorable, but it can result in
early redemption for investors.
2.5 Fixed-rate bonds
These bonds pay a fixed interest rate throughout their term, providing predictable
income to investors.
2.6 Floating-rate bonds
 The interest rate on these bonds is tied to a benchmark rate, such as LIBOR or the
prime rate, and adjusts periodically. They offer protection against rising interest rates
but may have lower initial yields compared to fixed-rate bonds.
3. Market Participants
The market for corporate bonds involves several key participants:
3.1 Issuers: These are corporations or companies that issue bonds to raise capital.
Issuers may vary in size, industry, and creditworthiness. They offer bonds to
investors in exchange for funds, with the promise of making periodic interest
payments and returning the principal amount at maturity.
3.2 Investors: Investors in corporate bonds include individuals, institutional investors
(such as mutual funds, pension funds, insurance companies, and hedge funds), and
other corporations. They buy bonds to earn interest income and potentially benefit
from capital appreciation. Investors assess the creditworthiness and risk-return
profile of different bonds to make investment decisions.
3.3 Underwriters: Underwriters are financial institutions or investment banks that
facilitate the issuance of bonds by helping issuers price and sell their bonds to
investors. They also provide advisory services to issuers and assist in the
preparation of offering documents. Underwriters may purchase bonds from issuers
and then resell them to investors or act as intermediaries in the primary market.
3.4 Rating Agencies: Rating agencies assess the creditworthiness of bond issuers and
assign credit ratings to their bonds based on factors such as financial strength,
repayment capacity, and business risk. Common rating agencies include Standard
& Poor's, Moody's Investors Service, and Fitch Ratings. Credit ratings help
investors evaluate the risk associated with different bonds and make informed
investment decisions.
3.5 Market Makers: Market makers are firms or individuals that facilitate trading in
the secondary market by providing liquidity. They stand ready to buy and sell
bonds at quoted prices, helping to match buyers and sellers. Market makers may
include broker-dealers, trading desks at investment banks, and specialized trading
firms.
3.6 Regulators: Regulatory bodies such as the Securities and Exchange Commission
(SEC) in the United States and regulatory authorities in other countries oversee
the corporate bond market to ensure transparency, fair practices, and investor
protection. They establish rules and regulations governing bond issuance, trading,
and disclosure requirements.
4. Trading risk in corporate bonds market
Market risk involves the potential for the value of an asset to decline due to sudden
changes in overall market conditions, such as unexpected events like natural disasters
or global financial crises.Corporate bonds offer many risks and rewards. Investors
looking to buy individual bonds should understand the advantages and disadvantages
of bonds, relative to other alternatives.
4.1 Credit Risk: This is the risk of the issuer defaulting on its debt obligations,
resulting in a loss of principal and missed interest payments. Credit risk varies
depending on the creditworthiness of the issuer and can be affected by factors such as
financial health, industry conditions, and market sentiment.
 4.2 Liquidity Risk: Liquidity risk refers to the difficulty of buying or selling bonds
without significantly affecting their prices. Corporate bonds, especially those with
lower credit ratings or less trading volume, may have limited liquidity, leading to
wider bid-ask spreads and potential difficulty in executing trades at desired prices.
4.3 Interest Rate Risk: Interest rate risk arises from changes in interest rates, which
can affect the value of fixed-rate bonds. When interest rates rise, bond prices typically
fall, and vice versa. This risk is particularly relevant for bonds with longer maturities,
as they are more sensitive to interest rate movements.
4.4 Market Risk: Market risk encompasses broader market factors that can impact
bond prices, such as economic conditions, geopolitical events, and market sentiment.
Changes in market conditions can affect investor demand for corporate bonds and
lead to fluctuations in prices and yields.
4.5 Call Risk: Callable bonds give issuers the option to redeem bonds before
maturity, typically when interest rates have declined. This introduces call risk for
investors, as bonds may be called away when interest rates fall, depriving investors of
future interest income and potentially resulting in reinvestment risk.
4.6 Reinvestment Risk: Reinvestment risk occurs when cash flows from bond
investments, such as coupon payments or bond redemptions, are reinvested at lower
interest rates than the original investment. This can lead to lower overall returns,
especially in environments of declining interest rates.
4.7 Event Risk: Event risk refers to the risk of adverse events affecting the issuer,
such as bankruptcy, mergers, acquisitions, or regulatory changes. These events can
impact the creditworthiness and financial stability of the issuer, leading to potential
losses for bondholders.
II. CORPORATE BONDS IN VIETNAM AND SOME SOUTHEAST ASIA
COUNTRIES
1. History of formation of Vietnam's corporate bonds market
Vietnam's corporate bonds market, while relatively young compared to those of other
nations, has witnessed substantial growth and evolution. Here's a concise account of
the genesis of Vietnam's derivatives market:
1.1 Early Stages (1990s - 2000s)
During this period, the corporate bond market in Vietnam did not develop strongly
due to limitations in regulations and financial infrastructure
1.2 The enactment of the Securities Law (2006)
The issuance of the Securities Law opened up a legal framework for the development
of the corporate bond market. This law provided more favorable conditions for the
issuance and trading of bonds.
1.3 Promotion from the banking sector (2010)
The State Bank of Vietnam promoted the development of the corporate bond market
to reduce credit pressure on the banking system.
1.4 Acceleration of development (from 2012 to present)
Over the years, the corporate bond market in Vietnam has experienced significant
growth. Enterprises have diversified their capital sources by issuing bonds to improve
liquidity and expand business operations.
2. Popular trading products
 Currently, the Vietnamese corporate bond market has two product lines accounting
for a high proportion: real estate bonds and bank bonds. These are two important bond
products. 67% of them all have short terms (1 to 3 years) with interest rates ranging
from 7.75% and an average term of 3.80 years. Typical examples are bonds of VPB,
ACB, BIDV...

3. Transaction volume of each product until the end of 2023

- In 2018, the scale of the corporate bond market experienced strong growth compared
to previous years, increasing by approximately 53% compared to 2017 and 32 times
compared to 2011, indicating that businesses have become increasingly interested in
and involved in raising capital through bond issuance alongside bank borrowing
channels. Most of the corporate bond issuances in 2018 were private placements.

- According to statistics released by the Hanoi Stock Exchange (HNX) and from
various enterprises, in 2019, a total of 211 companies conducted bond offerings
totaling 300,588 trillion Vietnamese dong, divided into 807 issuance tranches, of
which 12 tranches were unsuccessful. The total value of bonds issued throughout the
year was 280,141 trillion dong, equivalent to 93.2% of the offering value and a 25%
increase compared to 2018. Most of the enterprises issued bonds through private
placements, with only about 6% issuing bonds to the public, mainly by commercial
banks. There was only one international bond issuance worth $300 million USD by
VPB on July 17, 2019, with a term of 3 years, an interest rate of 6.25% per annum,
and the bonds were listed on the Singapore Stock Exchange.

- In 2020, the corporate bond market continued its strong growth trajectory, with
approximately 446 trillion Vietnamese dong of corporate bonds being raised through
private placements, public offerings, and international channels, representing a growth
of about 30% compared to 2019. The average term was 4.27 years, with an average
interest rate of 9.3% per annum. The real estate sector accounted for 42% of the total
bond issuance volume, reaching 184.6 trillion dong, followed by the banking sector
with 134.6 trillion dong raised, accounting for 31% of the total issuance volume.

- The value of corporate bonds issued throughout 2021 is estimated to reach 623.616
trillion Vietnamese dong, marking a significant increase of 34.8% compared to 2020.

- The corporate bond market significantly slowed down in 2022, with a total of 465
issuance tranches domestically, including 436 private placements and 29 public
offerings. The total value of corporate bonds issued reached 269.486 trillion
Vietnamese dong, a decrease of 63.7% compared to 2021.

Figure 1: Statistics of corporate bonds trading

- As of the end of 2023, the corporate bond market (CBM) has shown signs of recovery
as some investors have regained interest due to better interest rates compared to other
investment channels. This trend is reflected in the CBM where, in the first quarter,
there were hardly any issuance tranches, but from the second quarter onwards, the
volume of issuances has consistently increased month by month. Especially in the
third quarter, CBM issuance activities surged significantly, with the issuance value
nearly 2.7 times higher than the previous quarter and a 36.2% increase compared to
the same period.
- By the end of December 2023, the total value of CBM issuances reached 268 trillion
Vietnamese dong, a 1% decrease compared to the same period in 2022. The volume
of CBM repurchases before maturity reached 230.2 trillion dong, a 5.8% increase
compared to the entire year of 2022. The average CBM interest rate for the 12 months
of 2023 reached 8.3%, higher than the average rate of 7.9% in 2022.
Figure 2: Statistics of corporate bonds trading 2023
Tài liệu tham khảo
1. NGUYEN, Nhung Thi; NGUYEN, An Tuan; NGUYEN, Dinh Trung. The growth of the real
estate corporate bond market in Vietnam: the role of investor sentiment. Review of Behavioral
Finance, 2024, ahead-of-print.
2. GE, Wenxia; LIU, Mingzhi. Corporate social responsibility and the cost of corporate
bonds. Journal of Accounting and Public Policy, 2015, 34.6: 597-624.
3. Elton, E. J., Gruber, M. J., Agrawal, D., & Mann, C. (2001). Explaining the rate spread on
corporate bonds. the journal of finance, 56(1), 247-277.
4. Báo cáo Thị Trường Trái phiếu các năm của VBMA 2018-2023
5. https://mof.gov.vn/webcenter/portal/tpcp/pages_r/m/tong-quan-thi-truong-trai-phieu
6. VUONG, Quan-Hoang; BAC, Pham Nghiem Xuan. Vietnam: Exploring The Vietnamese
Corporate Bond. 2000.
7. https://thebank.vn/blog/20175-tim-hieu-thi-truong-trai-phieu-o-viet-nam.html