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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

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

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

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

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.

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.

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

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

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,

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

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.

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

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

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

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

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

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

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

(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

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

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

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,

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 maturityCapital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