Developing a yield curve and establishing a comprehensive database on bond issuers and their debt repayment histories would provide investors with crucial insights, enabling them to assess whether corporate bonds are overvalued or undervalued. Such tools could help mitigate risks in the corporate bond market, particularly for less experienced investors.

Gray areas in the bond market Vietnam’s corporate bond market has attracted a rising number of inexperienced investors. Nguyen Quang Thuan, chairman of FiinGroup, pointed out instances where investors without proper knowledge of the stock market have encountered difficulties. He mentioned a case where a doctor was struggling to resell VND7 billion worth of real estate bonds though there were assurances that they were “safe bonds” with a buyback guarantee. Similarly, Thanh Hang, a Hanoi resident who holds VND1 billion in bonds, is concerned about the bleak prospect of her getting back principal. She invested in bonds issued by a subsidiary of a large real estate corporation, assuming that bonds from such a company, secured by assets, were safe. However, she overlooked crucial factors like the company’s creditworthiness, the viability of its projects, and the reliability of its repayment guarantees. These risks are not limited to individual investors. Institutional investors can also be victimized. Duong Kim Anh, investment director at VCBS, noted that foreign funds require detailed bond data and information on the default probabilities of issuers for effective risk management. However, only a few major banks possess enough data to accurately model corporate default risks, and “this information is often kept internal and not widely available to the investor community,” Anh said. Tran Phu Viet, head of the Research and Product Development Department at FiinGroup, said that the lack of data makes it impossible to make accurate yield curve calculations. As a result, many rely on a simplified formula, combining the 12-month deposit rate with an average risk premium of 2-5%. This approach makes it difficult for investors to precisely assess the true value of bonds and their returns at maturity. Most bond price listings show only the dirty price, which includes accrued interest based on the coupon rate. For example, an investor buying a bond at its face value of VND100,000 with a nominal coupon rate of 10% per year might expect to receive a return that matches the nominal rate at maturity. However, if the issuing company faces financial difficulties, the bond’s trading value could drop to VND90,000, representing the clean price, which excludes accrued interest. In this scenario, an investor who purchased the bond at the original price would incur a loss if they sold it on the secondary market. Conversely, a buyer purchasing at the clean price in the secondary market could achieve a higher yield at maturity. “If the investor received full interest and principal upon maturity, they would have purchased the bond at a lower cost than the original owner. On the other hand, if the company continues to struggle and cannot meet its obligations, the bond would become expensive,” Viet emphasized. Without a reliable yield curve for reference, many individual investors are drawn to the nominal interest rate of 10% per year, believing it offers a better deal than bank deposits. However, in reality, the bond may be overpriced if associated risks materialize. More risk mitigation tools needed In the challenging environment of the privately-placed corporate bond market, a select group of investors has taken advantage of opportunities, with some bonds yielding returns of 6-13% since the beginning of the year and 10-17% over a one-year period. Bonds issued by state-run commercial banks and large private enterprises, such as VIC123029, MSN123008, and CTG121030, highlight the importance of monitoring investment yields and assessing risks to maximize returns and mitigate potential downsides. To achieve this, Tran Phu Viet recommended using pricing data provided by reputable investment advisory firms, which offer detailed information such as clean prices and yields. Furthermore, the trading price of any bond is heavily influenced by the issuing company’s ability to repay its debt at maturity. Investors should carefully evaluate the collateral and cash flow structure of bonds and conduct thorough checks on the issuer, including reviewing credit ratings, payment history, and overall financial health. While this data is available within banks, experts suggested that independent credit rating agencies should disclose this information to create a standard reference for market development. The Hanoi Stock Exchange (HNX) has made strides in improving transparency in the corporate bond market by updating its website with information about bond issues and issuers. This includes pre-issue data, unusual events, details about convertible bonds, warrants, early bond buybacks, bond swaps, and issuance results. Regarding the yield curve, Duong Kim Anh from VCBS said that comprehensive credit ratings across the market would provide stakeholders with a clearer understanding. In developed financial markets, the yield to maturity of bonds is determined by the bond’s term and the credit rating of the issuing company, as well as the specific bond issue. A higher credit rating typically corresponds to a lower coupon rate, reflecting a reduced risk of default. On the contrary, a lower credit rating results in a higher coupon rate due to higher default risk. Anh added that by aligning with a standard yield curve, issuers can set appropriate coupon rates based on their credit ratings. This approach can increase the success rate of bond issues and optimize risk management for the issuing companies.