The types of debt securities which can be listed on the Exchange are:

• Debt securities listed under Chapter 22 to Chapter 36 of the Listing Rules – this kind of debt securities can be invested by public investors.


• Debt securities listed under Chapter 37 of the Listing Rules – this kind of debt securities are offered to professional investors only and not offered to public investors in Hong Kong.

Debt securities listed on the Stock Exchange can also be categorized as follows:

• Corporate Bonds - Corporate bonds are debt securities issued by private and public corporations, eg listed companies or their subsidiaries may issue corporate bonds. When buying a corporate bond, investors are lending money to the corporation that issued it. The issuing corporation promises to return the principal on a specified maturity date to the bondholders. Until that time, the issuing corporation may pay the bondholders a stated rate of interest periodically, eg semi-annually.


• Convertible Bonds - Convertible bonds have investment characteristics of both debt and equity securities. A convertible bond gives its holder the right to convert the bond into shares of the issuing corporation according to predetermined terms during a conversion period or at conversion dates.
  
  Convertible bonds have the characteristics of debt securities, such as interest payments and a definite date upon which the principal must be repaid. They also offer possible capital appreciation through the right to convert the bonds into shares at the holder’s option according to stipulated terms over certain periods.
  
  Due to their conversion feature, convertible bonds usually offer a slightly interest payments than corporate bonds. As the price of the issuer’s shares increases, a convertible bond’s price also increases because the option to convert becomes more valuable.


• Exchange Fund Notes (EFN) - EFN are Hong Kong dollar fixed income bonds issued by the Hong Kong Monetary Authority (HKMA) on behalf of the Hong Kong Special Administrative Region Government for the account of Hong Kong’s Exchange Fund under the Exchange Fund Ordinance. Whenever the HKMA arranges the listing of an EFN on the Stock Exchange, investors may participate in the tendering for the new issue. Investors should contact their brokers for details.
  
  EFN trading is similar to stock trading and investors may trade EFN through their usual stock accounts. Like all debt securities traded on the Exchange, EFN are quoted in units of $100 of their nominal value. The buyer of an EFN has to pay to the seller the accrued interest calculated from the last interest payment date to the settlement date.
  
  For more information on EFN, please refer to Exchange Fund Notes Information for Investors on the Hong Kong Monetary Authority website.


• Government/Supranational bonds (GSB) - GSB are debt securities issued by a government or supranational organisation such as the People’s Republic of China or China Development Bank.

In addition to receiving the principal on expiry, holders of a debt security, in general, can receive an interest income at a rate higher than a general deposit rate.  The coupon rate of a debt security is the stated annual rate of interest that the issuer pays on the principal to the holder of the debt security.  Coupon rates can be divided into three main categories:     

Generally speaking, investors have to consider the following factors when investing in bonds:

1. Credit Rating

   Failure to pay interest to bond holders on time will constitute a default on the part of the issuer. Generally, investors can assess the risk of the bonds by referring to the credit ratings given by international credit rating agencies to the bond issuers. A guide to credit ratings by two rating agencies – Moody's and Standard & Poor's – is set out below.

   Moody’s	Standard & Poor’s
   Investment Grade		Explanation
   Aaa	AAA	Highest quality
   Aa1	AA+	High quality
   Aa2	AA	High quality
   Aa3	AA-	High quality
   A1	A+	Upper medium grade
   A2	A	Upper medium grade
   A3	A-	Upper medium grade
   Baa1	BBB+	Medium grade
   Baa2	BBB	Medium grade
   Baa3	BBB-	Medium grade
   Non Investment Grade		Explanation
   Ba	BB	Somewhat speculative
   B	B	Speculative
   Caa	CCC	Highly speculative
   Ca	CC	Most speculative
   C	D	Imminent default

   Other factors remaining equal, bonds with a higher credit rating generally offer a lower interest rate.

2. Relationship between interest rates and maturity

   The risk associated with a bond increases with the length of maturity. To compensate for this increased risk, investors generally demand a higher rate of interest for bonds that take a long time to mature. Generally, other factors being equal, the longer the period to maturity of a bond, the higher the interest rate.

3. Relationship between the price and yield of bonds

   The price of fixed rate bonds fluctuates according to changes in market interest rates. Prices for fixed rate bonds move inversely with changes in interest rates. In general, market interest rate movements have a larger impact on the price of bonds with a longer remaining period to maturity.

   

4. Liquidity of bonds

   Liquidity of some bonds in the secondary market may be low. Investors may find it hard to buy or sell such bonds and need to hold them to maturity.

5. Terms of bond issues

   It is important that investors pay attention to the terms of issue. For example, they should find out if the bonds may be redeemed before maturity.

6. Overall market conditions

   As with all investments (including bank deposits), returns on bonds are influenced by external factors such as interest rate movements, inflation, exchange rates and political changes.

It depends on whether the debt securities are eligible for settlement in CCASS.

Before accepting any instruction to purchase debt securities listed on the Exchange under Chapter 37 of the Listing Rules from a client, an exchange participant should conduct appropriate know-your-client procedures to ensure that such client is a professional investor in accordance with the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. If such client is an intermediary placing orders to the exchange participant as agent on behalf of its underlying customers, the exchange participant should ensure that those underlying customers who purchase debt securities listed on the Exchange under Chapter 37 of the Listing Rules through an intermediate broker are also professional investors.

Exchange participants shall implement appropriate and effective measures to ensure compliance with the above requirements under the SEHK Rules. Failure to comply with such requirements may constitute a situation calling for disciplinary action under the SEHK Rules.

Exchange participants should already have in place appropriate controls to comply with the investor eligibility requirement in relation to debt securities listed on the Exchange under Chapter 37 of the Listing Rules and necessary measures to rectify any non-compliance. For example, exchange participants should have prior agreement with their clients that a non-professional investor may be requested to unwind its debt securities positions as soon as possible.

As is the case of any violation of the SEHK Rules, an exchange participant should report to the Exchange if it had executed an order for a non-professional investor to purchase such debt securities. In addition, the exchange participant shall consider taking, or the Exchange may require the exchange participant to take, such actions or measures as may be necessary to remedy or rectify any non-compliance, for example, acquiring the positions of the non-professional investors; or to prevent any further non-compliance.

The Exchange takes any non-compliance seriously and will review and follow up on each incident. Follow-up actions may include issuing warning letters, conducting further enquiries, commencing investigations and reporting the matter to the SFC.