INVESTMENT MANAGEMENT (FIN358)

ASSIGNMENT INDIVIDUAL

FINANCIAL SECURITIES: BOND

PREPARED BY:
NUR HAZANI BINTI ABDUR RAHMAN
2020818012
BA1115C

PREPARED FOR:
MADAM NURAIN FARAHANA BINTI ZAINAL ABIDIN

SUBMISSION DATE:
30.11.2020
 TABLE OF CONTENT

NO. CONTENT PAGES

1. TABLE OF CONTENT 2

2. INTRODUCTION 3

3. BODY CONTENT 4-7

4. CONCLUSION 8

5. REFERENCES 9

2
 INTRODUCTION

Bonds are classified as a debt instrument and a fixed income investment. Fixed income is a
term that is frequently used to describe bonds because the investment receives a fixed
payment over the life of the bond. Because it covers the details of the loan and its payment,
a bond between the lender and the borrower can be used as an I.O.U. The bond holder is
the creditor or debit holder. The bond's details include the deadline for when the loan's
principal is due to the bondholder, as well as the conditions for variable or fixed interest
payments made by the borrower. Bonds, on the other hand, are financial securities in which
an investor lends money to an entity that lends money to a company or a government for a
set period of time or in exchange for a regular fixed interest rate. The borrower or issuer will
issue a bond that specifies the loan terms, the interest payment schedule, and the length of
time the funds will be lent. This must be repaid by the maturity date. The bond issuer returns
the investor's money and agrees to pay the stated interest rate when the bond reaches
maturity.

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 BODY OF CONTENT

Why are bonds bought by investors? Bonds are well-liked because they generate a
consistent flow of revenue. Two times a year is the norm for bonds to pay interest. The
bondholder may keep its cash while investing since when the bond matures, it will be able to
refund the whole principle. Furthermore, bonds might lessen exposure to shareholdings with
higher volatility. Corporations, towns, states, and other sovereign governments utilise bonds
to raise money and finance a range of initiatives, including operating cash flow, debt
financing, ongoing operations, new initiatives, or acquisitions, and boosting tax revenue. The
government, along with the municipalities, will utilise bonds to pay for infrastructure like
roads, hospitals, and schools. Borrowing money by businesses is a common strategy to fund
business growth, equipment purchases, and personnel expansion. Large organisations
always struggle with their need for more funding than the normal bank can offer. As a result,
when a big business issues bonds, it may offer a solution by letting many of small investor’s
act as lenders.

One of the three asset classes that investors are acquainted with are bonds, stocks
or equities, and cash equivalents, bonds are a fixed-income security. Direct bond issuance
to investors is an option for businesses looking to raise money for new initiatives, maintain
operations, or settle debt. The lender will issue a bond outlining the conditions of the loan,
the interest rate, and the deadline for repayment of the borrowed cash. Since bondholders
lent money to the issuer, one of the rewards they received was the payment of interest. The
interest rate used to determine the payment is known as the coupon rate. Most initial bond
values are fixed at the same amount, which is either RM100 or RM1,000 face value per
every bond. In contrast, a number of variables, including as the issuer's credit standing, the
maturity date, and the coupon rate relative to the current general interest rate environment,
affect the real bond market price. The bond's real face value will be returned to the borrower
when it matures. Bonds are divided into two categories issuer bonds and bonds with a set
maturity.

Bonds are classified as short-term, medium-term, or long-term in accordance with

their maturity terms. A company's short-term debt, also known as current liabilities, is a
financial obligation that is expected to be settled in less than a year, such as 1, 3, or 6
months. Short-term debt is typically listed in the current liability section of a company's
balance sheet liability section. Medium-term debt, also known as intermediate debt, is a type
of bond or other fixed-income security with a maturity date of 1 to 7 years. It is the most

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important variable in calculating income. Long-term debt, also known as government bonds,
is debt that has a maturity period of up to 30 years. Long-term debt can be seen in two ways
namely financial statement reporting by issuers and financial investment. The company must
record long-term debt disbursements and all related payment obligations on its financial
statements when reporting financial statements. Investing in long-term debt, on the other
hand, entails making debt investments that last more than a year.

Furthermore, bonds are classified as an issuer type. For example, government

bonds are issued by the government, whereas corporate bonds or private debt securities are
issued by private companies. On this basis, there are two types of government bonds which
are conventional bonds and Islamic bonds. Malaysian Government Securities (MGS) and
Malaysian Treasury Bills are two types of conventional government bonds (MTB). Malaysian
Government Securities (MGS) are long-term bonds issued by the Malaysian government
with maturities of more than one year. The maturity date is within 3, 5, 7, or 10 years, and it
was issued for development purposes. Bank Negara Malaysia (BNM) is a Malaysian bank
that also serves as a government advisor. BNM's roles include providing advice on the
details of the issuance of Government Securities as well as facilitating the issuance such as
through various market infrastructures that it owns and operates. Malaysian Treasury Bill
(MTB), on the other hand, is depicted as a Malaysian government issued a short-term
security to raise funds for government working capital. Bills with maturities of at least 3
months, 6 months, 6 months, and 1 year and a minimum value of RM10,000 are sold at a
discounted price through competitive auctions facilitated by Bank Negara Malaysia. The
Malaysian Treasury Bill is issued on a weekly basis, with the auction taking place the day
before the issue date. The successful cure's results will be announced the following day.

Next, there are two parts to Islamic Government Bonds. The sections are
Government Investment Issues (GII) and Malaysian Islamic Treasury (MTB). Government
Investment Issues (GII) are marketable government debt securities issued by the Malaysian
government to raise funds for the government's advancement use. Bank Negara Malaysia
offers serious sales of government investment issues to governments. Original maturities for
this type of government bond were 3, 5, 7, and 10 years. This bond was issued in
accordance with Shariah regulations. The Malaysian Islamic Treasury Bill (MTB), on the
other hand, is a short-term security issued by Bank Negara Malaysia on Islamic principles.
Malaysian Islamic Treasury Bills are typically issued on a weekly basis with a 10-year
maturity. The maturity date is in 1, 6, or 9 months and is deliberately removed for
advancement consumption. Instruments are issued in accordance with Islamic principles that
are deemed acceptable by Shariah requirements.

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 In the case of corporate bonds, investors who purchase them will lend money to
the company that issued the bonds. When the bond matures, the company will make a legal
commitment to pay the principal interest and, in most cases, to return the principal. To better
understand bonds, we must contrast them with stocks. For example, when buyers purchase
ordinary shares, they become owners of the company's equity and are entitled to the
dividends stated and paid by the company. Buyers of corporate bonds have no ownership in
the company. They will only receive benefits and bonds, regardless of the company's
profitability or share price increase. However, if the company runs into financial difficulties, it
is still required by law to make interest and principal payments on time.

Bonds clearly outperform other types of investments. Particularly short- and

medium-term bonds have less volatility than values, or what are known as stocks. In this
sense, bonds are typically regarded as safer investments than stocks. Other than that,
bonds do experience less daily volatility than stocks, and the interest payments on bonds
occasionally exceed the average level of profit payments. Bonds are often a liquid asset.
Although it may be more difficult for values, it is frequently fairly simple for an institution to
offer a large number of bonds without significantly changing the cost. In essence, bonds are
appealing due to the similar certainty of a fixed interest payment twice a year and a fixed
knot payment at construction. In addition, bondholders benefit from some legal assurance
under most countries' laws. If a company declares bankruptcy, its bondholders will typically
receive some cashbacks, even though the company's value stock frequently closes at zero.
Bonds also include agreements and promises. Additionally, a variety of bonds are available
to meet the various demands of financial professionals, including fixed-appraisal bonds,
floating-rate bonds, zero-coupon bonds, convertible bonds, and inflation-linked bonds.

There are several other risks associated with bonds' drawbacks, including call
and prepayment risk, credit risk, reinvestment risk, liquidity risk, event risk, trade rate risk,
instability risk, swelling risk, imperial risk, and surrender bend risk. Bond price fluctuations
will have an immediate impact on the common reserves that own such bonds. If the value of
the bonds in an exchange portfolio declines, the value of the portfolio also declines. For
knowledgeable investors like banks, insurance providers, benefit retailers, and resource
managers, this might be detrimental. The interest rate risk might become a real problem if
there is even a remote possibility that a holder of individual bonds would need to sell his
bonds and cash out. The guarantor's credit rating will determine how steady the cost of the
bond will be. For instance, if credit rating agencies like Standard & Poor's and Moody's
upgrade or lower the guarantor's credit rating. The display cost of the bond will decrease as
a result of an unexpected downsizing. Along with the fascinated rate risk, this risk has no
effect on the bond's intrigued instalments, but it puts the showcase cost at risk, which has an

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impact on holders of individual bonds who could need to sell them as well as pooled
reserves that hold these bonds. Some bonds are callable, which means that even if the firm
has agreed to make payments toward the obligation in instalments over time, the corporation
may decide to pay the bond off early. Reinvestment risk is created as a result, and the
speculator is forced to find an unfilled put for his money. As a result, the financial advisor
might not be able to find as good of a deal, especially given that this typically takes place
while interest rates are lowering.

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 CONCLUSION

Bonds are the same as IOUs, to recap what has been mentioned. By investing in a
bond, we are lending our money. Bonds are classified as fixed income instruments since
they have set cash flows. The face value, coupon rate, maturity, and issuer of a bond serve
as distinguishing characteristics. The rate of return on the bond is the outcome. When prices
increase, yields decrease, and when interest rates increase, the market price of bonds
decreases. Bonds, bills, and notes are the different maturity categories for fixed income
assets. The most secure bonds are those issued by the government, followed by municipal
and business bonds. Bonds are not risk-free since borrowers can always default on their
obligations, especially with corporate bonds. Bonds with a high risk/high yield are called
waste bonds. Most of the bonds are available for purchase via banks or brokers. Brokers
routinely increase the price of bonds instead of charging a fee when buying them.

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 REFERENCES

1. Fernando, J. (2020, November 18). Bond. Retrieved November 29, 2020, from
https://www.investopedia.com/terms/b/bond.asp

2. Parker, T. (2020, November 02). Bond Basics. Retrieved November 29, 2020, from
https://www.investopedia.com/financial-edge/0312/the-basics-of-bonds.aspx

3. Bond (finance). (2020, November 17). Retrieved November 29, 2020, from
https://en.wikipedia.org/wiki/Bond_(finance)

4. Bonds. (n.d.). Retrieved November 29, 2020, from

https://www.investor.gov/introduction-investing/investing-basics/investment-
products/bonds-or-fixed-income-products/bonds