Introduction to Bond Market

21st & 24th Dec 2007

Presented by

Capt (R) Georgy Gan
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What is a Bond Market?

• The bond market (also known as the debt, credit, or fixed income market) is a financial market where participants buy and sell debt securities, usually in the form of bonds. • As of 2006, the size of the: • international bond market is an estimated USD 45 trillion. • Malaysian bond market is an estimated RM 75.8 (USD 22) billion.

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• it means the issuer (government or corporation) is borrowing a specified amount of money from the investor for a specified period of time. 4 .• The bond market provide another avenue for governments or corporations to raise capital. bonds are debts or loans and when a bond is issued. • Essentially.

• in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date.What is Bond? • a bond is a debt security. with interest paid to the lenders upon maturity of the contract. 5 . • financial contracts that pledge to repay a specified or fixed amount of money. termed maturity.

Bond Issuer 1. 6 . • • Government Bonds issued are basically “risk free” The risk of default is fully guaranteed by the Government known as Malaysian Government Securities (MGS). Purpose to raise short and long term funding for their business and development activities.

• to increase of financial leverage (used borrowed funds to improve its return on investment) • an incentive of tax deductible (helps to reduce the amount of tax on the company profits) 7 . • an alternative instrument to issue of equity or preference shares. • Bonds issued by private entities or companies: Purpose to help finance their ongoing business activities.Bond Issuer 2.

8 . • usually unsecured in the sense that there are no liens or pledges on specific assets. secured by all properties not otherwise pledged. Bonds issued by private entities or companies consist of debentures. Debenture. • The advantage of debentures to the issuer is they leave specific assets burden free. secured (mortgaged) bond) and convertible bonds:a. • In the case of bankruptcy debenture holders are considered general creditors. and thereby leave them open for subsequent financing. • an alternative instrument to issue of equity or preference shares.Bond Issuer 3. • it is however.

in exchange for the benefit of reduced interest payments. – However.Bond Issuer b. usually at some preannounced ratio. 9 . the value of shareholder's equity is reduced due to the stock dilution expected when bondholders convert their bonds into new shares . Convertible Bond – type of bond that can be converted into shares of stock of the issuing company. – the key benefit of raising money by selling convertible bonds is a reduced cash interest payment.

Secured Bond – type of bond or note that is based on pools of assets.Bond Issuer c. – Assets are pooled to make otherwise minor and uneconomical investments worthwhile. or collateralized by the cash flows from a specified pool of underlying assets. 10 . • Allows it to pay a lower rate of interest than would be possible via a secured bank loan or debt issuance. – it can be used as credit enhancement by creating a security that has a higher rating than the issuing company which monetizes its assets. while also reducing risk by diversifying the underlying assets.

11 . • Paid out is base on a percentage of amount of bond.Investing in Bond An attractive investments because: 1. Produce Capital Gains – • Sold prior its maturity at more than purchase price • Held to maturity 2. Pay holders fixed interest income (coupon payment) • Paid out on quarterly or half yearly • Percentage of paid out is determined in advance.

pension. other private companies or managed funds (e. • There are corporate bonds (also called private debt securities) listed on the Bursa Malaysia that retail investors can buy.g. • An average investment being about RM5 million. in large amounts.Bond Investor • Financial institutions. insurance or unit trust funds). 12 . investors purchasing bonds are looking for investments that will give them • a stable fixed income and which are less risky than the stock market. • The individual investors do not normally participate in the bond market because they are normally sold over-the counter. • But in general.

• It is less risky than shares because it provides: 1. 13 • . it can continue to raise capital through the future issuance of bonds. so that the credibility of the government remains strong and 2. a fixed income from the coupons and 2. • In general. 1. the return of the principal is as stable as the issuer of the bonds.Why Invest in Bonds? • Most financial planners and fund managers view bonds as being less risky than shares but yielding more returns than fixed deposits. Bonds issued by stable governments of economically strong countries are considered the least risky. it is in a nation’s interest that bonds issued by its government pay their coupons and pay the principal sum upon maturity.

the bond market has grown substantially both in terms of trading activities in the secondary market and in terms of market liquidity. 14 .An alternative fund raising tool: • When the stock market is bearish. the securities laws have been amended to facilitate the development of the bond market which has been growing from strength to strength. • In Malaysia. Bonds provide an alternative avenue for corporations to raise capital. • In many developed countries. the market capitalisation of the bond markets are larger than that of the stock markets. • Over the past 10 years. • A mature bond market plays an important role in stabilising the overall financial system of a country.

then the bond is being sold at a premium.Bond Market Pricing Terminology • When the market price of the bond is less that its par value. • When the market price of the bond is more than its par value. the bond is considered as being sold at a discount. 15 .

• this means is that the issuer is able to raise funds for its use and the money raised from the sale of the bonds come directly to the issuer. that first trading is done at the primary market. 16 .How a Bond Traded? 1. Primary Market: • When the issuer (government or corporations or institutions) first offers new issues.

should they wish to do so.2. and this is referred to as the secondary market. among other factors. Secondary Market • Subsequently. and • prevailing interest rates. which are now able to sell off the bonds before the maturity date. • The secondary market provides liquidity to the individuals or institutions that have acquired the bonds. the bonds bought from the issuer can be bought and sold among other investors. 17 . • The trading of bonds in the secondary market creates a market pricing of the bonds that depends on • the supply and demand of the bonds.

• The secondary market plays an important role because: 1. Investors purchasing bonds at the primary market know there is an avenue to sell-off their bonds. 2. The secondary markets provide a gauge for issuers to price their primary issues. 18 .

• Bondholders have a prior right over ordinary shareholders on distribution of earnings and on claims in the event of bankruptcy. 19 . • Disadvantages • As the income (coupons) derived from bonds is fixed. irrespective of whether the company issuing the bonds is doing well or not. which have the following advantages and disadvantages when compared to buying shares: • Advantages • Investor receives periodic fixed interest income. • Bondholders have no voting rights and are not owners of the company while shareholders have a right to vote at general meetings.THE DIFFERENCE BETWEEN INVESTING IN BONDS AND INVESTINGIN SHARES? • Bonds are medium to long-term debt instruments. the investor does not get paid more even if business is booming as in the case of ordinary shareholders who may be given higher dividends.

Features of Bond 20 .

Basic Types of Bonds Irredeemable Redeemable Zero Coupon Coupon Paying 21 .

95 per cent for all the subsequent years if the call option is not exercised at the end of 10th year from the deemed date of allotment.45 per cent per annum with a step-up coupon rate of 10. War Bond or Perpetual Bond • Perpetual Bond India • Mumbai. said a press release from the bank.g. Sept. • Converted into another form of security 22 . The issue will carry a coupon of 10. Bank of India has announced an issue of Innovative Perpetual Debt Instrument bond series II with a view to increasing Tier I capital. or • e. 2007. 10.Irredeemable • Do not mature • No maturity date • Issuer is bound to make either • Perpetuity payments.

Intermediate term 5 to 12 years iii. Short Term 1 to 5 years ii. Maturity • Length of the time until loan contract or agreement expires Maturity date • i. Date the debt will cease to exist ii. Issuer will redeem the bond iii. Long Term > 12 years 23 . Issuer are committed to meet their obligations over this period • Classification: i.Redeemable Bond a.

face value & maturity value. • The name coupon originates from the fact that in the past. or it can be even more exotic. physical bonds were issued which had coupons attached to them. • It can also vary with a money market index. • Known as principal. Coupon • the interest rate that the issuer pays to the bond holders.b. • On coupon dates the bond holder would give the coupon to a bank in exchange for the interest payment. Par Value • The amount that the borrower promises to pay before the end of the term to maturity. redemption value. such as KLIBOR. c. 24 . • this rate is fixed throughout the life of the bond.

• Also known as an accrual bond.000 bond with a coupon of 7% will pay you $70 a year. • rendering profit at maturity when the bond is redeemed for its full face value. Coupon Bond • For example. • The reason it's called a "coupon" is because some bonds literally have coupons attached to them.• • Zero Coupon Bond • A debt security that doesn't pay interest (a coupon) but is traded • at a deep discount. • Holders receive interest by stripping off the coupons and redeeming them. a $1. 25 . • This is less common today as more records are kept electronically.

• In the U. Indenture • A contract between an issuer of bonds and the bondholder stating • the time period before repayment. most bonds are semi-annual. • if the bond is callable and the amount of money that is to be repaid. most bonds are annual and pay only one coupon a year. at what price or what ratio). • amount of interest paid. • In Malaysia. 26 . • In Europe.. most bonds are either semi-annual or annual.S.d. e. Coupon dates • dates on which the issuer pays the coupon to the bond holders. • if the bond is convertible (and if so. which means that they pay a coupon every six months.

which are construed by courts as contracts.e. • The terms may be changed only with great difficulty while the bonds are outstanding. with amendments to the governing document generally requiring approval by a majority (or super-majority) vote of the bond holders. restrictive covenant. covenants spell out what the borrower may do and must do in order to satisfy the terms of the loan..S. • E. • Likewise. • A clause in a loan agreement written to protect the lender's claim by keeping the borrower's financial position approximately the same as it was at the time the loan agreement was made. the borrower may be required to issue reports to bondholders on certain dates called protective covenant. • In the U.g. Covenants • a document specifying the rights of bond holders.. the borrower may be prohibited from issuing more debt by using certain assets as collateral. • federal and state securities and commercial laws apply to the enforcement of those documents. • Essentially. 27 .

28 . it grants option like features to the buyer or issuer: 1. restricting the issuer in its operations. Optionality: • a bond may contain an embedded option. • This is mainly the case for high-yield bonds. • These have very strict covenants. that is. • To be free from these covenants. Callability • Some bonds give the issuer the right to repay the bond before the maturity date on the call dates. • Most callable bonds allow the issuer to repay the bond at par. • With some bonds. the issuer can repay the bonds early. but only at a high cost. the issuer has to pay a premium. the so called call premium. • These bonds are referred to as callable bonds.f.

usually coinciding with coupon dates. There are four main categories. b. This is a special case of a Bermudan callable. 29 . Puttability • Some bonds give the bond holder the right to force the issuer to repay the bond before the maturity date on the put dates. d. • • Call dates and Put dates • the dates on which callable and puttable bonds can be redeemed early. Also known as a "survivor's option". An American callable can be called at any time until the maturity date. a.2. A Bermudan callable has several call dates. c. A European callable has only one call date. A death put is an optional redemption feature on a debt instrument allowing the beneficiary of the estate of the deceased to put (sell) the bond (back to the issuer) in the event of the beneficiary's death or legal incapacitation.

purchase bonds in open market. • alternatively.g. or. • which in turn call randomly selected bonds in the issue. then return them to trustees. • The entire bond issue can be liquidated by the maturity date. • If that is not the case. • Issuers may either pay to trustees. Sinking fund provision of the corporate bond indenture • requires a certain portion of the issue to be retired periodically. then the remainder is called balloon maturity. 30 .

h. 31 . • A convertible bond gives the holder the option to convert bond into shares of the issuer. an exchangeable bond (or XB) • is a straight bond with an imbedded option to exchange the bond for the stock of a company other than the issuer (usually a subsidiary or company in which the issuer owns a stake) at some future date and under prescribed conditions. • An exchangeable bond is different from a convertible bond.

Types of International Bond Market 32 .

1. 33 . A fixed rate bond is a long term debt paper that carries a predetermined interest rate. • • • Fixed rate bond is a bond with a fixed coupon (interest) rate. The interest rate is known as coupon rate and interest is payable at specified dates before bond maturity.

• At the beginning of each coupon period. 34 . Floating rate notes (FRNs) • are bonds that have a variable coupon. though counter examples do exist. plus a spread. like LIBOR or federal funds rate. • i. • Almost all FRNs have quarterly coupons. • A typical coupon would look like 3 months USD LIBOR +0.20%.2. • The spread is a rate that remains constant. they pay out interest every three months. equal to a money market reference rate. the coupon is calculated by taking the fixing of the reference rate for that day and adding the spread.e.

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High yield bond (non-investment grade bond, speculative grade bond or junk bond) • • is a bond that is rated below investment grade at the time of purchase. These bonds have a higher risk of default or other adverse credit events, • but typically pay higher yields than better quality bonds in order to make them attractive to investors.

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Inflation-indexed bonds (also known as linkers) • are bonds where the principal is indexed to inflation, and thus purports to cut out the inflation risk. • The first known inflation-indexed bond was issued by the Massachusetts Bay Company in 1780. • The market has grown dramatically since the British government began issuing inflation-linked Gilts in 1981. • Today, the asset class comprises over $500 Billion of the international debt market. • The market primarily consists of sovereign debt, with privately issued inflation-linked bonds constituting a small portion of the market.

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Asset Backed Security is a bond or note • that is based on pools of assets, or collateralized by the cash flows from a specified pool of underlying assets. • Assets are pooled to make otherwise minor and uneconomical investments worthwhile, while also reducing risk by diversifying the underlying assets. • Securitization makes these assets available for investment to a broader set of investors. • These asset pools can be made of any type of receivable from the common, like credit card payments, auto loans, and mortgages, or esoteric cash flows such as aircraft leases, royalty payments and movie revenues. • Typically, the securitized assets might be highly illiquid and private in nature.

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the subordinated bond holders are paid. • After they have been paid. • First the liquidator is paid. and so on. • Subordinated bonds usually have a lower credit rating than senior bonds.6. Subordinated bond • is a bond that has a lower priority than other bonds of the issuer in case of liquidation during bankruptcy. there is a hierarchy of creditors. then government taxes. and asset-backed securities.. the risk is higher. • The first bond holders in line to be paid are those holding what is called senior bonds. • As a result. • In case of liquidation. 38 . • The main examples of subordinated bonds can be found in bonds issued by banks.

but may be traded like cash. • Bearer bonds are very risky because they can be lost or stolen. • Especially after federal income tax began in the United States. • The person who has the paper certificate can claim the value of the bond.7. Bearer bond • is an official certificate issued without a named holder. bearer bonds were seen as an opportunity to conceal income or assets. 39 . • Often they are registered by a number to prevent counterfeiting.

Lottery Bonds • issued by France. lottery bonds resemble ordinary fixed rate bonds.8. • They are government bonds and only issued by a government. 40 . though usually long. • The serial number is the incentive for the purchaser to buy the bond. • A small number of bonds are redeemed for an amount greater than their face value. • Hence the holder of that particular bond will have won the ‘lottery’. Bear bond • is a bond issued in Russian roubles by a Russian entity in the Russian market. occasional bonds will receive a bonus. Belgium and the other major nations of Europe. tenor and pay regular coupons. 9. • Outwardly. • However there is a further complication. they have a fixed.

or 2. to break into foreign markets. 41 . The proceeds from the issuance of these bonds can be used by companies 1.Bonds Issued by Foreign Entities • • Issuing bonds denominated in foreign currencies also gives issuers the ability to access investment capital available in foreign markets. 3. can be converted into the issuing company's local currency to be used on existing operations. Foreign issuer bonds can also be used to hedge foreign exchange rate risk.

an Australian dollar-denominated bond issued by a non-Australian entity in the Australian market • Maple bond. a Canadian Dollar-denominated bond issued by a nonCanadian entity in the Canadian market • Samurai bond.• Eurodollar bond. a U.S. dollar-denominated bond issued by a non-U.S. entity outside the U. a non-yen-denominated bond issued in Japan by a nonJapanese institution or government 42 . a US Dollar-denominated bond issued by a non-US entity in the US market • Shogun bond. a Japanese Yen-denominated bond issued by a nonJapanese entity in the Japanese market • Yankee bond.S. • Kangaroo bond.

a Russian rouble-denominated bond issued in the Russian Federation by non-Russian entities. a Japanese yen syndicated loan by a foreign borrower • Formosa bond.• Bulldog bond. a pound sterling-denominated bond issued in London by a foreign institution or government • Matrioshka Bond. a Chinese renminbi-denominated bond issued by a non-China entity in the People's Republic of China market. • Arirang bond. a Korean won-denominated bond issued by a non-Korean entity in the Korean market • Ninja loan. 43 . a non-New Taiwan Dollar-denominated bond issued by a nonTaiwan entity in the Taiwan market • Panda bond.

Capital Market Master Plan . Begins in year 2001. 10 years plan strategic positioning and future direction of Malaysian capital 2. Represent vital part of financial market infrastructure 4.Malaysia 1. As an integral part and indicator of nation development 3. The success of M’sian Capital Market contributes to the overall strength of the economy 44 .

Objectives Strategic Initiatives 45 .

To be preferred Fund Raising Centre for Malaysian Companies • Enhance the efficiency of the fund raising process • Implement a comprehensive programme to develop the corporate bond market as a competitive source of financing • Facilitate the development of the venture capital industry to finance emerging high growth companies • Foster a liquid and efficient market for the secondary trading of securities 46 .1.

2. To promote an effective investment management industry and a more conducive environment for investors • • • • • Develop a strong framework for corporate governance and shareholder value recognition Heighten efforts to establish a vibrant and competitive investment management industry Enhance the role of institutional investors in the provision and management of funds Facilitate effective risk management by actively developing the derivatives market Facilitate the introduction of a broad range of capital market products catering to various risk-return profiles 47 .

3. To enhance the competitive position and efficiency of Market Institution • • • Restructure M’sian exchanges and clearing institutions to strengthen their efficiency and competitiveness Ensure M’sian exchanges are well positioned to respond to changing market dynamics through adoption of flexible business structures and commercially orientated strategies Enhance the efficiency of trading. clearing and settlement infrastructure 48 .

with high levels of business conduct and professional skills • Adopt a pragmatic programme for liberalization supported by appropriate safeguards 49 . To develop a strong and competitive environment for intermediation services • Foster constructive competition through regulation of services.4. products and fixed fee structure • Develop strong full-service brokers to provide a competitive market for integrated financial services • Ensure M’sian intermediation services are anchored on appropriate prudent standards.

5. To ensure stronger and more facilitative regulatory regime • Move towards a market based system of regulation for capital market activities • Ensure regulatory parity and consistency between all institution and participants conducting similar capital market activities • Ensure strong enforcement of the regulations governing the capital market • Enhance capacity for maintaining systematic and stability 50 .

tax and regulatory framework for the Islamic capital market • Enhance the value of recognition of the Malaysian Islamic capital market internationally 51 . To establish Malaysia as an International Islamic Capital Market Centre • Facilitate the development of a wide range products and services related to the Islamic capital market • Create a viable market for the effective mobilization of Islamic Funds • Ensure that there is an appropriate and comprehensive accounting.6.

and enhancing international positioning in areas of comparative and competitive advantage Sources: The Securities Commission. and develop strategic and nascent sectors Phase 2 (2004–05) Further strengthen key sectors and gradually liberalise market access Phase 3 (2006–10) Further expansion and strengthening of market processes and infrastructure towards becoming a fully developed capital market.Implementation of Capital Market Master Plan Phase 1 (2001–03) Strengthen domestic capacity. 52 .

Malaysia Bond Market 53 .

massive capital input will be required. • As the nation's industrialisation drive gathers momentum. • In Malaysia. • Are geared towards developing the capital market to complement the role of traditional lenders. 54 . the Ringgit bond market includes Government securities and personal debt securities. • The massive funding requirement will demand a concomitant broadening and deepening of the capital market as an efficient and reliable source of funding for private sector activity.• The main function of Malaysia bond market is to be the mediator between investors and depositors.

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Strategic developmental initiatives for the Malaysian bond market

Strategy 1. Introducing an efficient and facilitative issuance process

Initiatives • Release of Guidelines on the Offering of PDSs – 2000 • Introduction of a shelf-registration scheme – 2000 • Release of Guidelines on the Offering of Asset-backed Securities (ABSs) – 2001 • Release of Asset Securitisation Report – 2002 • Introduction of Guidelines on the Offering of Islamic Securities - 2004

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Strategic developmental initiatives for the Malaysian bond market

Strategy
2. Establishing a reliable and efficient benchmark yield

Initiatives
• Introduction of an auction calendar for Malaysian Government Securities (MGS) -2000 • Review of the principal dealers system

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Widening the issuer and investor base Initiatives • Broadening of the investor base under the Securities Commission Act for the OTC market • Universal Brokers are allowed to trade in the OTC market . tax deductions on issuance expenses) and a tax-neutral framework .2003.2002 • ABSs are introduced together with tax-neutral framework and tax deductions onissuance expenses . 2005 58 .2003 • Islamic PDSs are accorded various tax incentives (eg stamp duty waiver.Strategic developmental initiatives for the Malaysian bond market Strategy 3.

2004 • Removal of withholding taxes on interest income earned on investments by nonresident companies in ringgit-denominated Islamic securities and securities issued by the Malaysian Government . Widening the issuer and investor base Initiatives • Multilateral development banks.2004 59 .Strategic developmental initiatives for the Malaysian bond market Strategy 3. multilateral financial institutions and multinational corporations are allowed to raise ringgitdenominated bonds .

Strategic developmental initiatives for the Malaysian bond market Strategy 4. Improving liquidity Ain the secondary market Initiatives • Non-financial institutions are allowed to enter into repurchase transactions .2001 • Institutional Securities Custodian Programme (ISCAP) is put in place to encourage institutional investors to lend securities to BNM .2004 60 .2000 • The Securities Borrowing and Lending Programme is introduced via the RENTAS system .

Strategic developmental initiatives for the Malaysian bond market Strategy 5.2002. Securities Commission.2005 Sources: Bank Negara Malaysia. 2003 • Introduction of Guidelines on Regulated Shortselling of Securities . Facilitating the introduction of risk management instruments Initiatives • Introduction of three-.and 10-year MGS futures . five. 61 .

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Regulatory Authorities 1. As the issuance of bonds is deemed to be "deposit taking". take or accept deposits except under and in accordance with a valid licence. • It is also part of BNM's overall strategy to monitor the extent of public and private debt as part of their policy measures to manage liquidity and to contain inflation. BNM would ensure the availability of credit. in particular long-term credit at a reasonable cost to finance long-term projects. Bank Negara Malaysia (BNM) BNM regulates the activities of financial institutions via the Banking And Financial Institutions Act 1989 (BAFIA). the • approval of BNM is therefore required for any issuance of bonds. the approving authority for private debt securities has been transferred from BNM to the SC. no person shall receive. • At the same time. • Under BAFIA. 65 . without causing an inflationary pressure in line with the macro economic objectives. • Effective 1 July 2000.

Prior to the establishment of the SC. Both the CIC and the Panel were dissolved upon the 66 establishment of the SC. and take-overs and mergers. • • The SC also regulates all matters pertaining to unit trusts. the power to regulate the issue of new securities was vested with the Capital Issues Committee while all matters pertaining to take-overs and mergers were vested with the Panel on Take-overs and Mergers. Securities Commission (SC) The SC was established on 1 March 1993 pursuant to the Securities Commission Act 1993 with the power to regulate the issue of and the dealings in securities. to encourage the development of the securities market and to curb improper dealings. • .2.

after the acceptance of any 67 money or deposit or loan. • • In general.3. The Act also further requires that the prospectus be registered with the ROC and contains an undertaking that the corporation will. issue to that person a . has extensive powers under the Companies Act 1965 which lays down the statutory requirements and policies on disclosure of information. an invitation to the public to deposit money or lend money to a corporation must be accompanied by a prospectus. Registrar of Companies (ROC) The ROC under the Ministry of Domestic Trade and Consumer Affairs.

00.• • • However. trustee corporation. a person who acquires shares or debentures as principal for a value of not less than RM250. public company engaged primarily in the making of investments in marketable securities and such other persons as the Minister may declare to be exempt purchasers. individuals whose total net personal assets exceed RM3 million. statutory body. a licensed offshore bank and offshore insurer in Labuan. foreign incorporated companies. pension fund. 68 . The Registrar of Companies is responsible for the lodgement of prospectuses. Effective from 1 July 2000. The recently gazetted Companies (Exempt Purchasers) Order 1997 has declared the exempt purchasers to include licensed fund manager. exemption from the prospectus requirement is provided under Section 47B of the Companies Act 1965 for PDS issued to prescribed corporation.000. insurance company. licensed dealer or investment adviser. the SC is the registering authority for prospectuses in respect of all private debt securities other than securities issued by unlisted recreational clubs. unit trust scheme. corporations with the total net assets exceeding RM10 million.

MARKET PLAYERS The players in the bond market are: • • • • • • • • Lead Arranger Co-Arranger Facility Agent Underwriter Guarantor Principal Dealers Tender Panel Member Market Maker • • • • • • • Authorised Depository Institution Central Depository Trustee Registrar Paying Agent Money Brokers Rating Agencies 69 .

Bond Risk

• • • • • •

Inflation Risk Market Risk Currency Risk Political risk Credit Risk Liquidity Risk

• • • • •

Maturity Risk Reinvestment Risk Call Risk Price volatility Interest Rate Risk

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HOW ARE BONDS RATED?

• How do you know if an issuer is likely or not likely to default in paying back your principal or in delivering on the agreed periodic coupon payments?

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Rating Agencies,

independent of corporations issuing bonds, that analyses and provides a rating scale on bonds issued in the market. Credit analysis for bonds • is focused almost exclusively on the chance that the bondholder will not receive the scheduled interest payments or principal at maturity. • This is known as the default risk. • A borrower’s ability to repay or credit worthiness is an important criterion to the lender or bond purchaser.

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• within a consistent framework. • 73 . the degree of future default risk of a particular bond relative to others in the market.• Credit rating • is an objective and impartial third-party opinion on the ability and willingness of an issuer of a bond to make full and timely payments of principal and interest over the life of the bond. A rating is designed to rank.

1. • Both are privately owned and independent organisations.Rating Agencies in Malaysia Rating Agency Malaysia Bhd (RAM). • which was established in 1990 and the 2. • Institutions and investment fund managers use credit ratings provided by such independent agencies in gauging the credit worthiness of bonds. 74 . • established in 1996. Malaysian Rating Corporation Bhd (MARC).

• • • • P2 75 . Lacking in certain protective elements. AA High safety for timely payment of interest and principal. P3 Adequate safety with regard to timely payment of obligations.RAM Bond Rating Long-Term Ratings • • • • • • • • RATING DEFINITION AAA Issues rated AAA are judged to be of the best quality and offer the highest safety for timely payment of interest and principal. Future cannot be considered as assured. Adverse business or economic conditions would lead to lack of ability on the part of the issuer to pay interest or principal. BB Inadequate safety for timely payment of interest and principal. Factors present make them vulnerable to default. C Very high risk of default. Timely payment of interest and principal possible only if favourable circumstances continue D Payment of interest and/or repayment of principal are currently in default or face imminent whether or not formally declared. More susceptible to changes in circumstances and economic conditions than debts in higher-rated categories. B High risk associated with timely payment of interest and principal. Instrument is more vulnerable to the effects of changing circumstances than those rated in the P1 and categories. BBB Moderate safety for timely payment of interest and principal. A Adequate safety for timely payment of interest and principal. with doubtful capacity for timely payment of short-term obligations and well- default. NP High investment risk. Changes in circumstances are more likely to lead to weakened capacity to pay interest principal than debts in higher-rated categories. P2 Strong ability with regard to timely payment of obligations. Short-Term Ratings RATING DEFINITION P1 Very strong safety with regard to timely payment on the instrument.

indicates an adequate capacity to repay principal and pay interest. However. • C High likelihood of default. Adverse developments could negatively affect repayment of principal and payment of interest on timely basis. and therefore. greater likelihood of default. with little capacity to address further `adverse changes in financial circumstances • D Payment in default 76 . More vulnerable to adverse developments. Non Investment Grade • BB while not investment grade. • AA indicates that the ability to repay principal and pay interest on timely basis with limited incremental risk compared to issues rated in the highest category. both internal and external than obligations with higher rating.MARC Bond Rating RATING DEFINITION Investment Grade • AAA indicates that the ability to repay principal and pay interest on timely basis is extremely high. there significant uncertainties that could affect ability to adequately service debt obligations • B indicates higher degree of uncertainty. • A indicates that the ability to repay principal and pay interest is strong these issues • BBB the lowest investment grade category. this rating suggest that likelihood of default is considerably less than for lower-rated issues.

• Like other unit trust funds. 77 . bond funds approved by the Securities Commission are collective investment schemes that pool money from many investors for specific financial objectives (in the case of bond funds. to invest in bonds). • The funds are managed by a group of professional managers and the income earned from the investments is then distributed in the form of dividends to unitholders in proportion to their ownership.HOW DO I INVEST IN BONDS? The best way for Malaysians to invest in bonds is through bond funds or fixed income funds.

which acts as an intermediary for individual institutions seeking short-term credit and those with surplus cash to lend.• The general bond funds usually invest in the medium to long-term fixed income instruments while money market funds and short-term bond funds invest in short-term money market instruments. • Islamic bond funds would deal only with bonds issued by companies approved under the Syariah Principles. • The money market is a market for short-term fixed income instruments (usually with maturities less than a year. 78 . although some long-term fixed income instruments are also traded on the money market).

• It is expected that more bond funds will be introduced in the near future.• Banks and financial institutions issue money market instruments such as Negotiable Instrument of Deposit (NID) and Bankers Acceptance (BA). 79 . while the government issues money market instruments such as Bank Negara Bills (BNB) and Malaysian Government Treasury Bills (MTB). as the Malaysian bond market continues to grow.

• There are also quasi-government bonds. • corporations as corporate bonds or often called private debt securities. 80 . Cagamas bonds and Islamic private debt securities or Islamic bonds.WHAT ARE THE DIFFERENT TYPES OF BONDS? • Bonds are also classified according to the type of issuer. for example those issued by • government are called government bonds.

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82 . • There are also short-term money market instruments issued by the government such as: • Bank Negara Malaysia Bills (BNB) • Malaysian Government Treasury Bills (MTB).GOVERNMENT BONDS • Government bonds being traded are: • Government Investment Issues (GII) • Malaysian Government Securities (MGS).

Conventional Instrument 83 .

Malaysian Government Securities(MGS) • MGS are gilt-edged securities because they are borrowings of the government. • issued by auction and by subscription but they can also be bought in the secondary market or from Bank Negara Malaysia. 84 . • MGS are fixed-rate coupon bearing bonds with bullet repayment of principal upon maturity while coupon payments are made semiannually. as well as the prevailing supply and demand for the bond. • issued for the financing of long-term development projects by the government. • The price of government bonds is influenced by Bank Negara Malaysia’s price list published monthly.

• The successful bidders are determined according to the lowest yields offered and the coupon rate is fixed at the weighted average yield of successful bids. 85 . • Typically. however these characteristics may vary in the future. BNM has also introduced Callable MGS which provides the Government of Malaysia with the option to redeem the issue at par by giving an advance notice of five business days to the bond holders. the issue will be called in whole on specific coupon date(s).• Beginning December 2006. • The actual issuance size is announced a week before the issuance date.5 billion depending on Government financing requirement. • Both MGS and MGS callable are issued via competitive auction by Bank Negara Malaysia on behalf of the Government. • The typical issuance size ranges from RM1 billion to RM3.

• Standard transaction is RM5 million per lot. • The benchmark securities were often reopened to enlarge outstanding issue sizes in order to promote market liquidity. brokerage fee is payable. • For transactions via money brokers. 15-year and 20-year MGS were also issued to lengthen the benchmark yield curve. 86 . • Trades are settled in two business days (T+2) and are quoted on a price basis to two decimal points. 5-year and 10-year MGS as benchmark securities as part of its efforts to develop the benchmark yield curve. • Secondary market for benchmark securities is liquid with average daily transaction volume varying from RM100 million to RM500 million. In addition. • Neither stamp duty nor commissions are paid on the transfer of the securities.• The Government is committed to continuously issue 3-year.

87 .Bank Negara Monetary Notes (BNMN) • BNMN are securities issued by Bank Negara Malaysia replacing the existing Bank Negara Bills (BNB): • purposes of managing liquidity in the conventional financial market. • Discount-based BNMN will be traded using the same market convention as the existing BNB and Malaysian Treasury Bills (MTB) while the coupon-based BNMN will adopt the market convention of Malaysian Government Securities (MGS). • New issuances of BNMN may be issued either on a discounted or a coupon-bearing basis depending on investors' demand. • The maturity of these issuances has been lengthened from one year to three years.

• Normal auction day is Thursday and the result of successful bidders will be announced one day after. and 1-year. • MTB are issued on weekly basis and the auction will be held one day before the issue date. Band 4= 68 to 91 days to maturity). 88 ..Malaysian Treasury Bills (MTB) • MTB are short-term securities issued by the Government of Malaysia to raise short-term funds for Government's working capital. 6-month.g. • The successful bidders will be determined according to the most competitive yield offered. and it is actively traded in the secondary market. • The standard trading amount is RM5 million. with original maturities of 3-month. • MTB are tradable on yield basis (discounted rate) based on bands of remaining tenure (e. • Bills are sold at discount through competitive auction. facilitated by Bank Negara Malaysia. • The redemption will be made at par.

89 . and may be issued based on conventional or Islamic principle.Medium-Term Notes (MTNs) • MTNs are instruments with tenor of • more than one year but up to 5 years. • The mode of issue for MTNs can either be on direct placement and/or by way of tender.

90 .Khazanah Bonds • Issued by Khazanah National Berhad (an investment holding arm of the Government of Malaysia) and guaranteed by the Government.

Islamic Instrument 91 .

• GII are non-interest bearing government bonds issued to enable Bank Islam Malaysia and other institutions invest their liquid funds on an Islamic basis. • GII is long-term non-interest-bearing Government securities based on Islamic principles issued by the Government of Malaysia for funding developmental expenditure. 92 . • Similar with MGS. GII is issued through competitive auction by Bank Negara Malaysia on behalf of the Government. • The GII have maturities from one to five years. with coupon payments made on a semi-annual basis.Government Investment Issues (GII) • Introduced in July 1983 (then known as Government Investment Certificates or GIC) • issued in accordance with Islamic principles.

• Profit rate is based on the weighted average yield of the successful bids of the auction. • The nominal value of buying back the assets will be settled at a specified future date or maturity.year.5 billion and original maturities of 3-year. 5-year and 10-year.• Similar with MGS. • The GII issuance programme is pre-announced in the auction calendar with issuance size ranging from RM1 billion to RM3. • Under this principle. the Government will sell specified nominal value of its assets and subsequently will buy back the assets at its nominal value plus profit through a tender process. • GII is based on Bai' Al-Inah principles. part of the sell and buy back concept in Islamic finance. while the profit rate will be distributed half yearly. 93 . 7. GII is issued through competitive auction by Bank Negara Malaysia on behalf of the Government.

• GII is one of the financial instruments that are actively traded in the Islamic Interbank Money Market.• The obligation of the Government to settle the purchase price is securitised in the form of GII and is issued to the investors. the Government will redeem the GII and pay the nominal value of the securities to the GII holders. • At maturity. 94 .

• Discount-based BNMN-i will be traded using the same market convention as the existing BNNN and Malaysian Islamic Treasury Bills (MITB) while the profit-based BNMN-i will adopt the market convention of Government Investment Issues (GII). • The instruments will be issued using Islamic principles which are deemed acceptable to Shariah requirement. • The maturity of these issuances has also been lengthened from one year to three years.Bank Negara Monetary Notes–i (BNMN-i) • BNMN-i are Islamic securities issued by Bank Negara Malaysia replacing the existing Bank Negara Negotiable Notes (BNNN) for purposes of managing liquidity in the Islamic financial market. 95 . • New issuances of BNMN-i may be issued either on a discounted or a coupon-bearing basis depending on investors' demand.

part of sell and buy back concept. 96 . • The MITB are structured based on Bai' Al-Inah principle. on Friday. • Bank Negara Malaysia on behalf of the Government will sell the identified Government's assets on competitive tender basis. • Allotment is based on highest price tendered (or lowest yield). • MITB are usually issued on a weekly basis with original maturities of 1-year. • Both conventional and Islamic institutions can buy and trade MITB.Malaysian Islamic Treasury Bills (MITB) • MITB are short-term securities issued by the Government of Malaysia based on Islamic principles. to form the underlying transaction of the deal. • Normal auction day is Thursday and the results of successful bidders will be announced one day after.

g. • The standard trading amount is RM5 million. • The successful bidders will then pay cash to the Government. Band 4= 68 to 91 days to maturity). 97 .. • The bidders will subsequently sell back the assets to the Government at par based on credit term. • MITB are tradable on yield basis (discounted rate) based on bands of remaining tenure (e. and it is actively traded based on Bai ad-Dayn (debt trading) principle in the secondary market.• Price is determined after profit element is imputed (discounting factor). • The Government will issue MITB to bidders to represent the debt created.

a structure that is widely used in the Middle East. 98 .Sukuk Bank Negara Malaysia Ijarah (SBNMI) • SBNMI is issued • based on the Al-Ijarah or ‘sale and lease back’ concept. • A special purpose vehicle (SPV) has been established to issue the sukuk Ijarah.

Merdeka Savings Bonds • bond structure based on Shariah principles with the purpose of providing assistance to retirees who depend primarily on interest income from deposits placed with the banking institutions. 99 .

• The mode of issue for MTNs can either be on direct placement and/or by way of tender.Medium-Term Notes (MTNs) • MTNs are instruments with tenor of • more than one year but up to 5 years. and may be issued based on conventional or Islamic principle. 100 .

Islamic Government securities are similar to conventional Government securities in terms of their • effective cash flows. legal status in being a direct obligation of the Government. its holdings and nature of transaction as financial products. issuance structure. • 101 .Comparison between Conventional and Islamic Government Securities • The conventional securities and the Islamic securities differ only in its structure in terms of complying with Islamic principles in its issuance.

500 Interest payment is semiannual. Day count basis is Actual / Actual.000 to 3. or issued through private placement to selected institutions By competitive multipleprice auction on a yield basis Competitive multiple-price tenders are submited by Islamic bank or Principal Dealers with Islamic finance operations and are on a yield basis By competitive multipleprice auction on a yield basis 102 . Day count basis is Actual / Actual. MITB (Islamic) Government of Malaysia 273 and 365 days 100 to 200 Bills are issued on discount basis Method of sale in primary market Offered periodically via competitive multiple-price auction to Principal Dealers on a yield basis for new issues and price basis on reopened basis.500 Zero coupon GII) Bonds are issued on discount basis (Profit based GII) Profit payment is semi-annual.Features Issuer Tenor Issue size (RM million) Return payment (interest / profit) MGS (Conventional) Government of Malaysia 3 to 20 years 500 to 3. Coupon rate is market-determined base on the weighted average successfull yield of the issue. MTB (Conventional) Government of Malaysia 91. Profit rate is market determined based on the weighted average successful yield of the issue. 182 and 365 days 80 to 110 Bills are issued on discount basis GII (Islamic) Government of Malaysia 3 to 10 years 1.

Over-the-counter Secondary Market trading 103 . Over-the-counter Bonds are exempted from withholding tax. or issued through private placement to selected institutions Bonds are exempted from withholding tax. No capital gain tax. No capital gain tax.500 Competitive multipleprice tenders are submited by Islamic bank or Principal Dealers with Islamic finance operations and are on a yield basis MITB (Islamic) Government of Malaysia 273 and 365 days 100 to 200 By competitive multiple-price auction on a yield basis Taxation Bonds are exempted from withholding tax. Over-the-counter Bonds are exempted from withholding tax. No capital gain tax. No capital gain tax.500 Offered periodically via competitive multipleprice auction to Principal Dealers on a yield basis for new issues and price basis on reopened basis. 182 and 365 days 80 to 110 By competitive multiple-price auction on a yield basis GII (Islamic) Government of Malaysia 3 to 10 years 1.000 to 3. Over-the-counter MTB (Conventional) Government of Malaysia 91.Features Issuer Tenor Issue size (RM million) Redemption MGS (Conventional) Government of Malaysia 3 to 20 years 500 to 3.

• • 104 . Fixed Rate Bonds • These bonds are fixed coupon medium/long-term bonds where the interest is payable semi annually. Islamic Notes – Al Mudharabah • These debt securities are of medium-term tenor issued under the Islamic principle of Al Mudharabah with a pre-determined profit sharing ratio. Cagamas Notes • These notes are short-term securities with the tenor of 12 months or less.Cagamas Instruments • • Floating Rate Bonds • Securities or bonds issued by the Government of Malaysia. The notes are similar to MTB and normally issued at a discount.

CORPORATE BONDS • • Here are examples of the types of corporate bonds issued in the Malaysian capital market: • • • • • Straight bonds Convertible bonds Bonds with warrants Floating rate bonds Zero coupon bonds • Mortgage bonds • Islamic bonds • Secured and unsecured bonds • Guaranteed bonds 105 .

106 .

107 . • are often called “plain vanillas” as these bonds do not carry any other enhancement features but tend to carry high interest rates. as the name suggests. • with a fixed coupon rate.Straight bonds • Straight bonds are. bonds as simple as they can be. • The coupon is made either • semi-annually or annually and the principal • sum is paid at maturity to the bondholder. and maturity on a date fixed at the time of issue.

• The issuer benefits from paying lower coupons. and at a price agreed at the time of issuing the convertible bonds. 108 .Convertible bonds • give the holders a right to convert the bonds to a number of the issuer’s stock or shares during a period. • The coupon rate for such convertible bonds are typically lower compared to a straight bond because the holder is given the right of conversion. as well as maximising the proceeds received upon conversion by setting a higher conversion price to its existing share price.

its shares can be bought (through conversion) at what may prove to be a favourable price (if the conversion price is more favourable than the market price by the time of conversion). it loses its principal sum invested and the income from the coupons. but the investor who is now a shareholder will benefit from payments of dividends and any future increase in the share prices. • When the bond is converted to shares.• The investor also benefits because if the company performs well. 109 .

• Bonds with warrants have low coupon rates and are sold at a discount to yield the rate of return required by investors in the secondary market.Bonds with warrants • Bonds issued with detachable warrants are common in Malaysia. • The primary subscriber subsequently detaches the warrants and sells them to shareholders of the issuer in the secondary market. 110 . • The bonds are themselves distributed to institutional investors. • The issuer offers the entire issue of bonds with warrants at face value to a primary subscriber.

• For investors. when the warrants are exercised. 111 . bonds with warrants allow the issuer to first raise money through the sale of the bonds and later. money is again raised in purchasing the shares at the preset price.• A warrant gives the holder the option to purchase a specified number of shares at a preset exercise price and within a certain time period (exercise period). • For the issuer. it is attractive to have the option to buy shares at preset prices. • The exercise price is the amount the warrant holder has to pay in order to convert the warrant into an ordinary share.

Floating-rate bonds • The coupon rate of a floating-rate bond is instead pegged to an agreed benchmark. the floating rate also moves accordingly. 112 . such as • the KLIBOR (Kuala Lumpur Interbank Offered Rate) and as this reference rises and falls.

Mortgage bonds • Mortgage bonds require the issuer to pledge certain real assets as security for the bond. 113 . the bondholders can foreclose on the pledged assets to satisfy their claims. although in practice such foreclosures are unusual. • In the event of a default.

114 .Islamic bonds • Islamic bonds are structured according to the Islamic principle of deferred payment sale. and require the endorsement of the • Syariah • Advisory Council of the Securities Commission.

the investors would have a claim on the pledged assets. typically shares. the bondholders would have a general claim on the issuing company. Conversely. • Due to its higher risk factor. • 115 . a building or land. • In the event of a default. unsecured loans are bonds not backed by any collateral.Secured and unsecured bonds • The debt payments of secured bonds are secured by a pledge of the issuer’s assets. • In the event of a default. unsecured loans offer higher interest rates than secured bonds.

116 . which could be the parent company or one or more financial institutions. • The safety of the bond therefore depends on the financial capability of the issuer and the guarantor to satisfy the terms of the guarantee.Guaranteed bonds • Guaranteed bonds are guaranteed for full debt repayment by a guarantor.

117 .

WHAT ARE THE COMMON TERMS USED IN ASSOCIATION WITH BONDS? • The following characteristics and terms are always associated with bonds and we need to understand what they mean in order to understand bonds. • • • • • • • • • Nominal value Coupon rate Term-to-maturity Trust deed Trustee Type of issuer Yield Call provision Sinking fund 118 .

• This is the amount the issuer of the bond has agreed to pay the bondholder at the maturity date. 119 . the principal is also called the redemption or maturity value. also referred to as the principal value of the bond.Nominal value • The nominal value of a bond is the par or face value and sometimes. • In view of this.

000 and the coupon rate is 7%. then the bondholder will receive RM3. if the nominal value of the bond is RM100. then the bondholder will receive an annual interest of RM7.000. • If the agreed periodic payment is every six months.g. • E. 120 .Coupon rate • • The coupon rate is the amount of interest the bondholder will receive periodically.500 every six months.

the bondholder is paid the promised coupon payments and it also indicates the time period remaining before the bondholder is paid back the principal.Term-to-maturity • This is the number of years over which the issuer of the bond has promised to meet the conditions and obligations of the bond issue. 121 . • The term-to-maturity also affects the bond yield and the bond price. • During this time.

such as a requirement for the company to set up a sinking fund. or the inclusion of a call provision.Trust deed • A trust deed is the legal agreement detailing the issuer’s obligations related to the bond issue. • An independent trustee administers the trust deed. 122 . • It contains the terms of the bond issue and any restrictive provisions placed on the company.

123 .Trustee • The trustee is the third party with whom the trust deed is made. • As the trust deed also contains provisions in the event of default. • The job of the trustee is to see that the terms and conditions of the trust deed are carried out. the trustee would undertake action to protect the interests of the bondholders in the event of a default.

124 . • banks. • financial institutions • companies.Types of issuer • A key feature of a bond is the nature of the issuer. • In Malaysia. the issuers of bonds can be • the government.

and does not change till maturity. the price of the bond decreases. • While the coupon rate is fixed at issue. • As the required yield increases. the yield is the discount rate or interest rate that an investor wants from investing in a bond.Yield • There is often confusion between the yield and the coupon rate of a bond. 125 . • Price bonds are quoted in relation to their yields. • The reverse is also true.

Call provision • A call provision entitles the issuer to repurchase or “call” the bond form their holders at a stated price within a predetermined period. 126 .

• This provision may be included in the bond trust deed to protect investors. the issuer periodically puts aside money for the eventual repayment of the debt.Sinking fund • In a sinking fund bond. 127 .

How RM Bonds are Traded? 128 .

that first trading is done in the primary market. • The secondary market provides to the bond holders should they wish to sell the bonds before the maturity date. • When the market price of the bond is less than its par value. and the prevailing interest rates. the bond is being sold at a discount. • The trading of bonds in the secondary market creates a market pricing of the bonds that depends on the supply and demand of the bonds. • When the market price of the bond is more than its par value. among other factors.• When the issuer first offers new issues. the bonds can be bought and sold among other investors. Subsequently. in the secondary market. the bond is sold at a premium. • 129 . • where the money raised from the sale of the bonds goes directly to the issuer for its use.

Tender details are announced in Bond Information Dissemination System (BIDS) and feed into REUTERS and Bloomberg.30am 1 day before issue date. PDs submit bids via Fully Automated System for Issuing/Tendering (FAST) by 11. • • 130 . BNM processes and confirms tender results by 12pm. BNM invites for tender via Fully Automated System for Issuing/Tendering (FAST) 7 days before issuance date.Primary Bond Market • • BNM issues Malaysian Government Securities (MGS) via auction process through Principal Dealers (PDs). Securities allotment via Delivery-versus-Payment (DvP) is processed through Real Time Electronic Transfer of Funds and Securities (RENTAS) on issue date.

131 .

private placement.• Method Of Issuance • The two methods of issuance adopted in the primary market of Government securities in Malaysia are 1. market auction and 2. 132 .

Petroliam Nasional Berhad (Petronas . corporates.largest petroleum company in Malaysia). but all bidders are to submit bids through PDs. 2. • Among the primary investors of Government securities are the 1. 3.Primary Investor • Securities auctions are open to all investors. insurance companies including Takaful operators (Islamic insurers). asset management companies and 6. 4. financial institutions (including PDs). Employees Provident Fund (EPF). 5. 133 .

Secondary Bond Market • • Deal reporting and dissemination of information is captured in Bond Information Dissemination System (BIDS). the transaction becomes latest deal done in Bond Information and Dissemination System (BIDS). Concluded deals entered into Financial Institution (FI) treasury system. Trades settlement take place on value date through Real Time Electronic Transfer of Funds and Securities (RENTAS) via DvP process. Bond Information and Dissemination System (BIDS) provide last deal done information (price/yield. 134 • • • . volume) and daily turnover volume. Seller initiates trade reporting in Bond Information and Dissemination System (BIDS) and buyer confirms trades. Once confirmed.

While non MGS benchmarks are referred to as "off-the-run" issues. • Every morning PDs will submit and advertise their indicative bids and offers on all benchmark securities in the Bond Information and Dissemination System (BIDS) system. • All trading done via the OTC market must be captured on Bond Information and Dissemination System (BIDS) system where the sellers of securities will key in the deal and buyers will confirm within a stipulated 10 minutes cut-off time from trade execution. the 3-year. MGS benchmarks. • 135 . • Principal Dealers (PDs) appointed by Bank Negara Malaysia are committed to provide continuous two-way prices in MGS.Secondary Market Trading • Government securities and other scripless debt instruments are traded in the secondary or "over-the-counter" (OTC) market either via • a money broker. 5-year and 10-year are the most actively traded and commonly referred to as "on-the-run" issues. • Non-PD financial institutions may also choose to make market by quoting two-way prices in the Bond Information and Dissemination System (BIDS) system. direct dealing on telephones or via the Electronic Broking System (EBS). • In the secondary market. as they are obliged to make market.

• Non-RENTAS members such as institutional investors and other financial institutions can transact scripless securities via their ADI. value tomorrow or value forward. 136 . ownership and transfer of Government securities are reflected as book entries in the Authorised Depository Institutions (ADIs) custody accounts with Bank Negara Malaysia in the Real Time Electronic Transfer of Funds and Securities (RENTAS) system. • Reopened MGS shares the same stock identifiers with the existing stocks.m.30 p. to 4.e.• • Normal business hours for a regular government securities trade is for standard settlement or value spot i. • Cash payments of coupons and redemption proceeds will be passed to the investors via their respective ADIs.00 a. from Monday to Friday excluding holidays. • All Government securities trades are settled based on a delivery versus payment (DvP) basis although free-of-payment settlement (FoP) is available where necessary. therefore are indistinguishable and fungible. from 9. Government securities can also be traded on value today. 2 business days (T+2) settlement.m. • As Government securities are scripless securities.

Market Infrastructure 137 .

• Process Flow The FAST system can be summarised in 7 business processes as follows: (i) Invitation to Tender The facility agents invite for tenders by entering information on the forthcoming tender at least 3 business days before the tender date.The Fully Automated System for Tendering (FAST) • is an automated tendering system whereby invitations to tender. Any changes in the information is updated in the system for dissemination to all FAST members before the tender closing date. 138 . to reduce errors and delays arising from manual handling of tenders as well as to eliminate potential disputes that may arise from the bidding process. bids submission and processing of tender for SSTS instuments and short term private debt securities are done electronically. Objective To improve the overall efficiency of the tendering procedures.

which includes the type of security. 139 . (iii) Submission of Tender All bids by members must be submitted before the stipulated cut-off time. tender date. All members of FAST can assess to the information on the forthcoming tenders. issue amount and other details relating to the issue. (iv) Tender Processing After the cut-off time. Access to the system after the cut-off time is denied. The system also allows for intervention by the facility agents. the system automatically sorts and ranks the bids (yield/price) in ascending/descending order and award the stocks to the successful bidders until the amount of the issue is fully allotted. issue date. maturity date.(ii) Tender Information The invitation by the facility agents would be the source of the tender information. The Information Memorandum will state the relevant terms and conditions pertaining to a particular issuer for tender.

the other FAST members can only view the general results. they will be transmitted through the system to the bidders. The general bidding results are also announced through the information providers such as Reuters and Telerate. However. 140 . All bidders are able to retrieve their own results.(v) Tender Results Once the results are verified and finalised. (vi) Data Analysis FAST members can download bidding information at their workstations for data analysis and end-user reporting.

discount houses and Islamic banks). other financial bodies and other market participants.• (vii) Settlement For fund settlement purposes. • For PDS tendered through FAST. development banks. • FAST Membership Membership in FAST is currently opened to licensed inancial institutions (commercial banks. the results of the tender for SSTS instruments will be linked to RENTAS for allotment of securities and cash transfer. the settlement is done manually either through Interbank Funds Transfer System (IFTS) or cheque clearing. 141 . merchant banks. as approved by Bank Negara Malaysia. statutory bodies. insurance companies.

BIDS • is a computerised centralised database on Malaysian debt securities. • Process Flow (i) Maintenance of Static Database The lead arrangers and rating agencies will input information into BIDS through their workstations located at their premises. providing information on the terms of issue. real-time prices. The transparency of information provided by BIDS is expected to facilitate both the primary and secondary market activities in the domestic bond market. These information will be disseminated real-time. thereby facilitating efficient trading in the secondary over-the-counter market and enhancing liquidity in the debt securities market. 142 .Bond Information and Dissemination System. details of trades done and relevant news on the various debt securities issued by both the Government and the private sector. Objective To provide transparency with regards to information on bonds issued.

(iv) Individual Corporate Homepage/Members News Information relevant to the debt securities market can be input into corporate homepages and members' news pages. merchant banks.• (ii) Advertisement of Indicative Prices The licensed financial institutions can input indicative bids and offers into BIDS. money brokers. Tier-1 finance companies. discount houses and Islamic banks). the rating agencies. Cagamas Berhad. • BIDS Membership Membership in BIDS is currently opened to licensed financial institutions (commercial banks. as approved by Bank Negara Malaysia. 143 . insurance companies and other market participants. • (iii) Capturing of Trades Done Trades done are reported in BIDS and the system will disseminate the last done price and volume real-time. This will provide users with information on the demand and supply situation in the market.

the receiver will be able to use the funds immediately without being exposed to the risk of the funds not being settled. • Thus. • RENTAS System will enable payment instructions between the participants of the System to be processed and settled individually and continuously throughout the working day. • All settled transactions will be considered as final and irrevocable.RENTAS • The RENTAS System is a real time gross settlement system (RTGS) for the transfer and settlement of high value ringgit denominated interbank funds and scripless securities transactions. 144 .

• This mechanism would enable transfer instructions for both scripless securities and funds to be effected on a trade-bytrade basis. 145 .• The RENTAS System will also contribute to the reduction of settlement risk in scripless securities transactions by providing a mechanism for delivery-versus payment (DVP). with final (unconditional) transfer of the securities from the seller to the buyer (delivery) occurring at the same time as the final transfer of the funds from the buyer to the seller (payment).

Bond Calculation 146 .

147 . the price or value of a bond is determined by discounting the bond's expected cash flows to the present using the appropriate discount rate. the fair value of a bond is the present value of the stream of cash flows it is expected to generate. • As with any security or capital investment.Bond Valuation • Bond valuation is the process of determining the fair price of a bond. • Hence.

• the par or face value F. each of which is made once every period. • r is the market interest rate for new bond issues with similar risk ratings 148 . which is payable at maturity of the bond after T periods.The present value relationship • The fair price of a straight bond is determined by discounting the expected cash flows: • Cash flows: • the periodic coupon payments C.(NB final year payment will include the par value plus the coupon payment for the year) • Discount rate: the required (annually compounded) yield or rate of return r.

Bond Price. Po = ∑ N C n=1 ( 1 + rn ) n + F ( 1 + rN ) N 149 .

• Because the price is the present value of the cash flows. • A bond trading below its face value is trading at a discount. • A bond trading above its face value is at a premium. 150 . there is an inverse relationship between price and discount rate: • the higher the discount rate the lower the value of the bond (and vice versa).

Coupon yield = C / F • Coupon yield is also called nominal yield.Coupon yield • The coupon yield is simply the coupon payment (C) as a percentage of the face value (F). 151 .

Current yield

• The current yield is simply the coupon payment (C) as a percentage of the bond price (P).
Current yield = C / Po.

152

Yield to Maturity

The yield to maturity (YTM) is the discount rate which returns the market price of the bond. • It is thus the internal rate of return of an investment in the bond made at the observed price. • What an investor will earn on the bond if it is held to maturity. YTM can also be used to price a bond, where it is used as the required return on the bond. • Solve for YTM where YTM = (Par Value – Current Price) / n (Current Price + Par Value ) / 2

153

• Market Price =
N

C
n

MPo = ∑ (1 + YTMn)
n=1

+

F

( 1 + YTMN )

N

154

• hold the bond until maturity. • When a bond sells at par. In these instances. other measures such as option adjusted spread should be used instead when comparing yields across different types of bonds. The relationship between yield to maturity and coupon rate is as follows: • When a bond sells at a discount. and coupon yield.• • To achieve a return equal to YTM. and • redeem the bond at par. the bond owner must: • reinvest each coupon received at this rate. • When a bond sells at a premium. such as mortgage-backed securities or asset-backed securities. including yield to maturity. 155 • • . The concept of current yield is closely related to other bond concepts. YTM = current yield = coupon yield. YTM > current yield > coupon yield. coupon yield > current yield > YTM. The YTM is of limited use in valuing bonds with uncertain cash flows.

that all coupon and principal payments will be made and coupon payments are reinvested at the bond's promised yield at the same rate as invested. • If a bond's current yield is more than its YTM. • If a bond's current yield is less than its YTM. • The YTM is almost always given in terms of annual effective rate. 156 • . • The calculation of YTM is identical to the calculation of internal rate of return. • This technique in theory allows investors to calculate the fair value of different financial instruments. then the bond is selling at a premium. • If a bond's current yield is equal to its YTM. then the bond is selling at a discount. It is a measurement of the return of the bond. then the bond is selling at par.Yield to maturity (YTM) • is the yield promised by the bondholder on the assumption that the bond will be held to maturity.

Introduction to Bond Market THE END THANK YOU 157 .

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