Introduction

:
The bond market is a financial market where participants buy and sell debt securities, usually in the form
of bonds. Bond Market is composed of Treasury bond, Municipal Bond and Corporate Bond. This
is of two kinds- Organized and OTC markets. There are arious types of bond products
depending on proisions, maturities, coupon rate, options, conertibility, etc. Bond Market in
Bangladesh is dominated by treasury debt securities. !t has now only one corporate bond" but
does not hae any municipal bond#debenture. !n recent years, around $% percent of the domestic
saings are held in the form of bank deposits, while only &% percent are inestments in the debt
market which is entirely dominated by goernment instruments. There hardly e'ists a corporate
bond market in the country, it has a debenture market with only a small number f well-known
issuers. (s of today, only one corporate bond has been floated.
History of bond market of Bangladesh:
Before independence, the use of bonds as a means of resource mobilization was irtually non-
e'istent in Bangladesh. !mmediately after liberation, the goernment of Bangladesh reissued
long-term bonds accepting the liabilities of the !ncome Ta' Bonds and the )efense Bonds of the
*akistan goernment held by Bangladeshi nationals and institutions. The goernment also issued
a +, non-negotiable bond to Bangladeshi shareholders of nationalized industries. !n addition,
saings bonds were also issued to pay for the alue of demonetized -%%-taka notes in -.$/. Most
of these bonds are held by Bangladesh bank.
The first effort to mobilize saings for use of deelopment e'penditure was the issue of 0age
1arners )eelopment Bonds in -.2- to be sold to Bangladeshi wage earners abroad. 3ater, a
two-year special treasury bond was issued in 4anuary -.2/ to be sold to indiiduals, public and
priate sector organizations including banks. !n )ecember -.2+, another instrument, the
5ational Bond, was issued to be sold to non-bank inestors.
)uring the implementation period of the financial sector reform programmed that took effect
from -..%, 5ationalized commercial banks, specialized banks and deelopment financial
institutions had to make considerable proisions for huge classified loans. (s a result, the capital
base of those banks and financial institutions eroded seerely and their iability was seriously
threatened. !n this situation, the goernment issued a series of bonds to restructure the capital
base of these banks and financial institutions as well as to assume the liabilities of the bad loans
made to a number of public sector organizations.
The goernment also issued some bonds for augmenting loan able funds for specialized banks
and financial institutions. Moreoer, some bonds were also issued to mobilize funds for a
number of public sector organizations like the T6T Board, Bangladesh Biman etc.
Types of bonds:
On the basis of Variability of Coupon:
1. Zero Coupon Bonds
7ero Coupon Bonds are issued at a discount to their face alue and at the time of maturity,
the principal#face alue is repaid to the holders. 5o interest 8coupon9 is paid to the holders
and hence, there are no cash inflows in zero coupon bonds. The difference between issue
price 8discounted price9 and redeemable price 8face alue9 itself acts as interest to holders.
2. Floating Rate Bonds
!n some bonds, fi'ed coupon rate to be proided to the holders is not specified. !nstead, the
coupon rate keeps fluctuating from time to time, with reference to a benchmark rate. :uch
types of bonds are referred to as ;loating <ate Bonds. These bonds are known as !nerse
;loaters and are common in deeloped markets.
On the Basis of Variability of Maturity:
1. Callable Bonds
These securities hae proisions allowing the issuer to redeem the issue prior to the
scheduled maturity date
2. Puttable Bonds
The holder of a puttable bond has the right 8but not an obligation9 to seek redemption
8sell9 from the issuer at any time before the maturity date. The holder may e'ercise put
option in part or in full.
3. Convertible Bonds
The holder of a conertible bond has the option to conert the bond into e=uity 8in the
same alue as of the bond9 of the issuing firm 8borrowing firm9 on pre-specified terms.
This results in an automatic redemption of the bond before the maturity date.
On the basis of Principal epayment:
1. Amortizing Bonds
(mortizing Bonds are those types of bonds in which the borrower 8issuer9 repays the
principal along with the coupon oer the life of the bond. ;or e'ample - auto loans, home
loans, consumer loans, etc.
2. Bonds with in!ing Fund Provisions
Bonds with :inking ;und *roisions hae a proision as per which the issuer is re=uired
to retire some amount of outstanding bonds eery year. The issuer has following options
for doing so>
i. By buying from the market
ii. By creating a separate fund which calls the bonds on behalf of the issuer
Types of bond market:
The :ecurities !ndustry and ;inancial Markets (ssociation classify the broader bond market into
fie specific bond markets.
-. Corporate
?. @oernment 6 (gency
&. Municipal
/. Mortgage Backed, (sset Backed, and Collateralized )ebt Obligation
+. ;unding
Corporate bond market of Bangladesh:
The issues of deeloping a corporate bond market that is currently near non-e'istent in
Bangladesh. The two maAor sources of financing are the banks and capital market. 1=uity
financing from capital markets through issuing new shares is lenient whereas debt financing
through issuing corporate bonds is almost none'istent.
easons for !on"e#istence of Corporate Bond Market:
1. Bigh interest rate is a barrier to the corporate bond market. @oernment still borrows
through arious national saings schemes at high interest rates and banks collect deposits at
=uite high interest rates in competition with goernment securities. Bigh interest rates
deterred public borrowings by the corporate bodies, thereby thwarting the e'pected
deelopment of a corporate debt market.
2. (bsence of secondary bond market is a maAor reason for non-e'istence of corporate bond
market in Bangladesh. They mean that secondary organized market which includes OTC
market, and priate placement market for corporate bonds.
3. 3ack of awareness and education deter to attract right issuers and inestors in the corporate
bond market. :O1s, multinational companies, infrastructure proAects and large as well as
medium enterprises shy away. The corporate sector of Bangladesh, for instance, insurance
companies, proident funds and pension funds of arious organizations, mutual funds, etc.,
are not inoled in this enture.
". 3ack of knowledge-based trading een for goernment bonds is an important reason for
inactie corporate bond market. Bangladesh Bank has issued nine *) licenses but these are
yet to fully start their actiity. !n the goernment bond market, *)s can play an important
role to actiate the secondary market of treasury bills and goernment securities. 3ater on,
*)s can spread this knowledge based trading to the corporate sector.
#. 3ack of innoatie products has kept the market unattractie .:ecurities bearing zero and
fi'ed coupons, and bonds following !slamic shariah only are aailable currently in
Bangladesh. Bonds like Treasury !nflation *rotected :ecurities 8T!*:9, !slamic Bonds
8:CDCD Bond9, Bigh-Eield Bonds 8BEB9, and )eep )iscount Bonds may help formation
of corporate bonds market in Bangladesh.
Bond Market Participants of Bangladesh:
One of the preconditions of being efficient bond market is the e'istence of large number of
market participants. Market participants can be diided into issuers, inestors and intermediaries.
1. $ssuers%
Most priate sector enterprises are small and owner-run, many are of Fcottage sizeG and most are
in the garment industry, which to date depends largely on short-term bank loans for financing.
These enterprises could benefit from longer-term funding but are neither large enough nor well
known enough to issue bonds. Most of the large-scale industrial units and commercial enterprises
are state owned. Their shares are not listed, and they do not offer debentures since their financing
needs are met by the goernment or by the state-owned 5CBs. These state-owned firms
generally stay outside the capital market.
(lthough Bangladesh has a debenture market, to date only a small number of well-known issuers
hae used the market. The li=uidity in those debentures at the stock e'change is insignificant
because of the small number of inestors and their buy-and-hold mentality. The inestor
community does not seem to find this market too attractie owing to weak disclosure by the
issuers, which in turn reduces credibility and inestor confidence.
2. $nvestors%
;ew inestors are sophisticated enough to think about inesting in bonds. (bout 2%, of the base
here is made up of retail inestors, whose primary concerns include the e=uity at the stock
e'change or the goernment saings certificate. Of the few institutional inestors that could
support a bond market, most are either preented from inesting in corporate bonds by restrictie
guidelines or are not professionally managed. The maAor institutional inestors are the
!nestment Corporation of BangladeshHa goernment-owned financial institutionHand the
insurance companies. The mutual fund industry in Bangladesh is the e'clusie domain of !CB.
There are no priate mutual funds to mobilize saings toward the debt market, and the !CBIs
monopoly has preented new inestor companies, that is, mutual funds, from deeloping in
Bangladesh. ;ew foreign inestors are attracted to this, mainly because of the weak disclosure by
the borrowers..
3. $ntermediaries%
!ntermediaries in Bangladesh lack many of the skills needed to foster an actie local corporate
bond market. Commercial banks dominate the financial sector and not enough intermediaries are
skilled in securities. ;ew are able to identify issuers and inestors and bring them to the market.
They proide little or no research analysis on industries or companies to encourage inestment in
the local debt market. Too few priate merchant banks are able to conduct financial adisory and
trust serices. Bence the market is illi=uid, with large spreads. (t the same time, the fee structure
and pricing are high enough to allow intermediaries to make money. 1en if they are able to
participate, intermediaries are reluctant to take any risk in dealing.
Benefits of Bond Market for Market Participants:
Bond Market acts as buffer of e=uity market. This enables issuers and inestors to conert the
limitations of e=uity market into the opportunities. ;inancial system to be sound and effectie
has to hae an efficient bond market. Otherwise, Capital Market especially cannot play its due
role for deeloping economy through allocation of capital" and generating employment
opportunities through industrialization of economy of the country.
1. Bene&its &or $ssuers%
• <aising funds without collateral for long term.
• 3ower cost of debt and thereby lowering cost of capital for the firm.
• 3ower effectie rate of interest for not being able to be compounded.
• 5o change in interest rate with the increase in inflation rate.
• <educes ta' burden since interest is shown as a charge.
• *rotecting firms from the e'position to the market olatility
2. Benefits of Investors:
• *ays higher interest rates than saings.
• Offers safe return of principal.
• Bae less olatility than the stock market.
• Offers regular income.
• <e=uires smaller initial inestment.
• Bighly li=uid
3. Benefits of Intermediaries:
• 3arge spread can be e'ploited.
• Bigh commission#fees.
• *henomenal growth opportunities.
• Cut down policy of commercial lending brings opportunity for broadening bond
market base.
Market Interest ates and Bond Prices:
Once a bond is issued the issuing corporation must pay to the bondholders the bondIs stated
interest for the life of the bond. 0hile the bondIs stated interest rate will not change, the market
interest rate will be constantly changing due to global eents, perceptions about inflation, and
many other factors which occur both inside and outside of the corporation.
The following terms are often used to mean market interest rate>
1. effective interest rate
2. yield to maturity
3. discount rate
". desired rate
Cost of bond issuance in Bangladesh bond market:
To issue new bonds in Bangladesh is very much formal which includes huge amount of
oversubscription fees. It greatly affects the issuance of bond in Bangladesh. The
following is a list of considering factor.
1. :ecurities and 1'change Commission registration.
2. *ublication of prospectus
3. *rinting of prospectus and application
". Certificate, postissue, postage
#. 3isting fees
'. !ssue manager or underwriter
(. Trustee fee
). Credit rating ,bankers, legal and audit
*. Central depository fee
egulators and egulations of Bangladesh bond market:
The regulator and regulation leel is the oerlapping authority between the two financial market
regulators, Bangladesh Bank and the :ecurities and 1'change Commission 8:1C9, and no clear
Aurisdiction oer the fi'ed-income market. !n general, BB regulates the commercial banks and
their actiities, while the :1C regulates the 5B;!s, the two stock e'changes, and the capital
market.
The :1C has no authority to issue rules and regulations, and the procedure as a whole is long and
drawn out. (s a result, the :1C has not proposed any regulations for the issuance of bonds or
debentures. (ll rule proposals must first be submitted to the Minister of ;inance for approal and
then passed on for approal from Ministry of 3aw. ;urthermore, potential issuers hae to look at
arious sets of regulations and follow a long and cumbersome procedure.
(lthough the :1C re=uires listed companies to meet international standards on accounting and
auditing, accounting information appears to be of doubtful =uality and reliability.
The :ecurities and 1'change (ct of -..& confers ast regulatory authority on the state, and is
regarded as a constraint on capital market deelopment. There is a board of policymakers. Three
of its members are appointed by the state, another is from the Ministry of ;inance and one from
the central bank, and the chairman is appointed by the goernment.
!n the present system, a company can float debentures up to a ma'imum amount of its current
asset alue and has to register its assets in the name of the Trustee as :ecurity. Bence there is no
proision for floating unsecured debentures.
$tatus of bond market of Bangladesh in $outh %sia:
The bond market has played a limited role in the Bangladesh economy. The Bangladesh bond market is
also rather shallow compared to the neighboring countries. The size of debt market is ery low as
compared to other :((<C countries. There are huge opportunities for growth and making
money for bond market participants.
BangladeshJs bond market represents the JsmallestJ in :outh (sia, accounting for only -? per cent
of the countryJs gross domestic product 8@)*9, a 0orld Bank report said.
(t C:K$.&+ billion, the size of the countryJs bond market is far smaller than the banking assets,
estimated at nearly K&? billion-e=uialent to more than +% per cent of @)*, the bankJs report on
L:outh (sian domestic debt marketL said.
L!t is surprising that Bangladesh, which is much larger than 5epal in terms of population, land
area and other measures, has the smallest bond market in the region. !t said that !ndiaJs bonds
amounted to &+ per cent of @)* while 5epalJs domestic bonds were -+ per cent.
(s a per cent of @)*, :outh (sian e=uities account for $$ per cent, banking assets around M- per
cent and bonds for only &/ per cent.
0hile !ndia dominates all three markets, :ri 3ankan bond market accounts for almost +- per cent
of its @)*, comprising entirely of goernment bonds.
;or the 1ast (sian countries, corporate bonds hae amounted to nearly ..% per cent of the @)*
while for the selected O1C) countries the ratio is around -M per cent.
The size of the :outh (sian financial markets was some -/ per cent that of 1ast (siaJs. The total
financial assets in the region amounted to nearly C:K? trillion as of end ?%%M and !ndia
accounted for 2. per cent of the total.
The largest component of the :outh (sian financial assets is attributed to the e=uity market at
K2$$ billion followed by the banking sector at KM2+ billion and the bond market at K&2% billion.
(s the countryJs bond market remains less-deeloped, the report said Bangladesh should improe
the efficiency of the primary market for goernment securities by gradually increasing the share
of marketable goernment securities, thereby raising li=uidity in the secondary market.
Turning to the !slamic bonds, the bank report praised the issuance of !slamic bonds with si'-
month, -.% year and ?.%-year maturities that are in compliance with !slamic shariah rules.
To purchase such bonds, Bangladeshi institutions and indiiduals as inestors, are re=uired to
share profits or losses with bond issuers in accordance with the !slamic regulations.
Problems of bond market of Bangladesh:
1. (bsence of Market-determined !nterest <ate
2. <egulatory <eform
3. 3ack of Benchmark Bonds
". Cnbundled *ension and !nsurance ;unds
#. Bigh Eielding @oernment !nstruments Bindering *riate :ector Bond !ssue
'. *oor Marketability
(. Bigh Time to Market for Time Consuming and Complicated (dministratie *rocess
). Cndefined 1conomic Benefits
*. !nestorIs <eluctance to Maintain Bond *ortfolio
1+. Conseratie *olicy of !nestors
11. 3ack of (wareness *rogram for !nestors and <isk (ssociated :e=uential *rocess
12. (derse *erception by Market *articipant of :ettlement <isk
13. 3ack of !ntermediaries with 1'pertise in )ebt *roducts
1". Bigh ;loatation Cost
1#. *olitical !nstability
1'. *oor )isclosure of (ccounting !nformation
1(. 3ack of (wareness and Confidence in )ebt *roducts
1). )ominance of Banking :ystem
1*. *oor :aings and !nestment <ate
2+. ;inancial :ector Nulnerability for Buge 5on-*erforming 3oans
21. Moderate 1conomic @rowth
22. 3ow !nterest <ate 1nironment
Prospects of a bond market in Bangladesh:
)espite the earlier setbacks the bond markets in Bangladesh is ready to take off. The need for a
bond market in Bangladesh deseres attention because of the following>
1. ;oreign aid flow is diminishing and the trend is e'pected to continue.
2. :pecialized banks are not in a position to supply desired leel of long term fund.
3. Commercial banks hae strategically cut down their long term lending.
". The concept of prudent asset mi' is most likely to generate demand for inestment grade
bonds.
#. The *roident ;unds and !nsurance Companies ;unds are not generally allowed to inest
their funds in stock market instruments. There is a bright possibility that these funds may
be permitted to inest a part of their funds in marketable instruments subAect to prudential
guidelines, which may necessitate supply of lucratie debt instruments.
'. <eduction in the interest on @ot. saings instruments and withdrawal of certain saings
instruments is e'pected to boost demand for debt instruments.
(. The registration fee for trust deed has been reduced from ?.+, 8on the amount of
debentures9 to Tk. ?+%%.%% proiding a ery significant incentie.
). There are now credit rating agencies to proide rating prospectie issuer.
*. (ny interest paid by inestor on money borrowed for inestment in debentures is deducted
from total income.
1+. !nterest income not e'ceeding Tk. ?%%%% receied by an indiidual inestor on debentures
approed by :1C is e'cluded from total income.
11. The interest on 7ero coupon bond approed by :1C at the hand of the recipient is ta'
e'empt up to Tk. ?+%%%.%%. :uch interest e'ceeding Tk. ?+%%%.%% is subAected to ta' O
-%, deducted at source. Banks and other financial institutions and insurance companies
which are the mainstay of demand for bonds will now pay -%, ta' on interest on such
bonds instead of /+, ta' payable on other income.
Measures to de&elop the bond market of Bangladesh:
( sustainable bond market needs enabling policies. The following actions and policy measures
are seen important to promote a bond market in Bangladesh.
1. <ationalization of the !nterest <ate :tructure whereby the @oernment borrows at the
lowest possible rate
2. 1stablish benchmarking and long-term Eield Cure.
3. *roide a 3egal ;ramework of user friendly <ules 6 <egulations
". )eelop a system of issuance of future :oereign *apers as Tradable and Transferable
:ecurities.
#. ;und future infrastructure proAects through issuance of @oernment and *riate Bonds.
'. 3ower <egistration and !ssue cost
(. Create independent Credit <ating (gencies.
). )eelop and strengthen market intermediaries like dealers, inestment analysts, inestment#
merchant bankersI etc.
*. ;acilitate education process of market participants
1+. Cnbundle pension and insurance funds and establish Money Market Mutual ;unds.
11. (llow !nestment @rade Corporate Bonds and )ebentures to form part of :3< of Banks
12. ;acilitate :ecuritization and issuance of (sset Backed :ecurities and Collateralized 3oan
Obligations with the backing of multilateral agencies and deelopment of Money Market
instruments.
13. 1stablish Central )epository and 1lectronic :ettlement and <egistration :ystem.
1". Cpgrade (ccounting and )isclosure :tandards as well as ;oreclosure 3aws.
Conclusion:
Bond Market is an integral part of the financial market of a country. !t proides a medium for the
redistribution of short term loan-able funds among financial institutions, which perform this
function by selling these short term securities that usually are highly marketable .it can
contribute a lot to a deeloping country like Bangladesh. Though the bond market of Bangladesh
is ery prospectie, it is bested with numerous problems. !f all the aboe things can be done, then
this could pae the path for a well-functioning bond market that can change the e'isting bank-
oriented financial system to a multilayered system, where capital markets can complement bank
financing.