LECTURE 5

INVESTMENTS IN BONDS AND

SHARES
LEARNING OUTCOMES
At the end of this chapter, you should be able to:
• Explaining the factors that determine an individual’s risk profile
• Analyze the risk and returns investments in bonds in Malaysia
• Discuss investment in shares in Malaysia.
• Discuss considerations that need to be made by individuals before investing in
shares.
• Describe valuation methods and other factors that can impact share prices and
returns.
• Discuss methods of investment in shares
• Discuss behavioural finance biases on personal investing decisions
 Determination of an individual’s risk profile
• An individual’s investment risk profile will differ depending on his/her needs, life-cycle and
lifestyle factors, attitudes and values as well as his/her changes in personal circumstances.
• Different reasons for investment
• Safety needs – Value capital preservation in the short to medium term. Tend to be risk
averse
• Income needs – Generation of stable passive income.
• Growth needs – Capital gain objective
• Tax planning
• In Malaysia, capital gains from buying selling of shares, bonds and other
financial instruments are generally exempted from tax
• However, real property gains tax (RPGT) will apply for investments in
properties.
 Evaluating an individual’s risk profile
• Demographic factors - Consider the individual’s age, level of financial training and awareness,
income level, family situation and job stability

• Attitudes and values

• Combination of emotions, beliefs and behaviours toward a particular subject matter.
• Attitudes can be formed as a result of upbringing/nurture and related experiences that
may influence a person’s behaviour, including investments.

• Personal circumstances and special needs

• Past experience in investment
• Unexpected events such as retrenchment, health issues or death of main breadwinner.
• Family commitments
 Types of investment and risk profile
In investment planning, only once the risk profile of an individual is determined,
can we begin the search for suitable investments.
Level of risk Examples of Malaysian Investments
Lower ❖ Fixed deposit
• Risk adverse investors ❖ Amanah Saham Bumiputra(ASB)/ Amanah Saham Wawasan 2010(ASW)
• Generally, focus more on capital preservation ❖ Tabung Haji
• Lower yield ❖ Unit Trust – Balanced fund, Money Market fund, Fixed income/Bond fund
❖ Property
Moderate ❖ Unit Trust – Balanced fund, Equity fund, Index fund
• Combination of dividend and capital gains ❖ Commodities e.g. gold
• Longer term with moderate yields ❖ Public listed shares
❖ Property investments including REITs
Aggressive ❖ Unit Trust – Aggressive fund, international funds, sectoral funds
• Mainly capital gains and growth ❖ Hedge fund/ foreign investments
• High risk and high yields ❖ Foreign exchange
❖ Commodities
❖ Stock market – speculative shares
❖ Property investment- land, commercial and residential property.
 Investment on Bonds
• A bond is a debt security.
• It arises when a company has a large project/developments(s) that it needs to
finance but it needs to borrow to do this.
• As the projects are usually very large, these companies require huge amounts of
financing that bank borrowings alone may not be adequate. As such these
companies would issue bonds in the capital market to attract lenders (also known as
investors) to provide the financing.
• As we are dealing with huge loans (millions and billions of ringgit/dollars), the debt
securities/bond issuers and lenders/investors in Malaysia are dominated by
sophisticated investors such as pension funds, big banks and/or unit trust funds.
• Individual investors participate in the bond market through unit trusts, pension funds
and insurance companies.
Investment in Bonds

http://www.investsmartsc.my/investment-product/bonds
12-7
 Credit Rating
• Rating Agency of Malaysia (RAM)
• Malaysian Rating Corporation Berhad (MARC)
• Moody’s
• Standard & Poor
• Fitch Rating
• As bond issuer’s credit rating decreases, it has to pay higher rate of
interest to sell bonds and borrow money.

8
 International Bond Rating Agencies

https://www.bixmalaysia.com/Learning-Center/Articles-Tutorials/Why-is-Credit-Rating-Important-for-Bond-and-Sukuk
 Malaysian Bond Rating

https://www.bixmalaysia.com/Learning-Center/Articles-Tutorials/Why-is-Credit-Rating-Important-for-Bond-and-Sukuk
10
 Prepayment or Call Features
• Specific bond terms may cause bond’s price to react unexpectedly to changing
interest rate.
• Issuers of bonds with a call feature may redeem/buy back their bond early if the
interest rates are expected to fall.
• These issuers can then issue new bonds (or re-borrow) at a lower rate. In
this case, the call reduces the coupon payments they have to pay.
• However, callable bond issuers may have to compensate investors with
better coupons at the time the bond is issued (as the investors’ returns
could be affected by the call feature).
• Bonds with infinite payback schedule will have different price strategies for
changing interest rates.
• Some bonds have a call protection period. During this period, the bond issuer
cannot exercise the call on the bond.
12
 Bond valuation
Bond Price (P)

Factors that affect the bond price:

▪ Changes in interest rate/yield (i) - The higher the yield (i), the lower will be the bond price(P), vice versa→ Inverse relationship
between yield and bond price

▪ Coupon rates
▪ Coupon payments (C) are fixed act as a buffer against changes in bond price.
▪ Ceteris paribus, for similar yield and maturity, the higher the coupon payments the higher would be the bond price.
▪ However, if the yield increases (i), the bond price will reduce for similar coupon rates.

▪ Maturity of the bond

▪ Generally, the higher the maturity of bond, the greater would be its price at the same coupon rate and yield

▪ Call features
▪ Call features allow for the issuer to redeem or repurchase the bond before its maturity date.
 Risks of investments in Bonds
• Interest rate risk
• Changes on yield that will affect bond pricing.
• Inflation risk – failure of returns to keep in pace with inflation

• Credit risk
• Risks that bond issuer will not be able to make the coupon/interest and principal
payments as and when they fall due.

• Currency risk (for investment in foreign bonds)

• Liquidity risk
• Arises when investors may have difficulty finding a buyer and may be forced to sell
at a significant discount to market value
 Investment in Shares
• Shareholding represents a part of an ownership in a company.
• In Malaysia, anyone above the age of 18 can participate directly in the share
market though an initial public offering and/or through a stock exchange for
shares of listed companies.
• To buy and sell shares, one needs to open a Central Depository System (CDS)
account with Bursa Malaysia.
• No maturities and guarantees of return in ownership of shares. Companies are
assumed to be in existence on a going concern basis.
• Investments in shares are regulated by the Securities Commission (SC) and
Bursa Malaysia.
 Common reasons for investment in shares
• Flexibility of buying and/or selling part of your share investments at any time
• Diversification – many types of shares on Bursa Malaysia (income, growth, Blue
Chip etc)
• Keeping in pace with inflation – Shares may provide a hedge against inflation.
• Considerable tax advantages.
• Capital gains arising from share investments are tax exempt in Malaysia.
• Currently dividend income is treated as single tier and also tax free in the
hands of the investors.
 Classifications of share investments in Malaysia
• Ordinary versus Preference shares
• Ordinary shares have voting rights but rank below preference shares for dividends
• Capitalization level
• Classification based on large, medium and small capitalization
• FTSE Malaysia Indices classifications
• Other common classifications
• Blue chip shares – Generally based on FTSE KLCI 30
• Cyclical shares - Sales and profits of cyclical companies and thus their share
prices would fluctuate depending on the business cycle or condition of the
economy.
• Defensive shares – Shares that have stable earnings and consistent dividends
• Income shares – Consistently able to pay above average dividends.
• Growth shares – Low dividends but focus on high growth in earnings and capital
gains. Higher risk investments.
• Value shares - Shares with intrinsic values that is higher than the current market
price.
 FTSE Bursa Malaysia Indices

For more details : Click the following link

https://www.bursamalaysia.com/trade/our_products_services/indices/ftse_bursa_malaysia_indices/overview
https://research.ftserussell.com/products/downloads/FTSE_Bursa_Malaysia_Index_Series.pdf?_ga
=2.40872610.1280532483.1619843763-129661621.1619843763
• Mid & Small Cap Stocks Deliver Better Returns Over the Long Term
https://bursaacademy.bursamarketplace.com/en/article/equities/mid-small-cap-stocks-deliver-better-returns-over-the-long-term
 MESDAQ Versus ACE Market

ACE Market – easier to list http://www.thestar.com.my/Story/?file=%2F2009%2F8%2F1%2Fbusiness%2F4429822&sec=business

12-20
Bursa Malaysia: FAQ on General Information of LEAP
https://www.bursamalaysia.com/reference/faqs/leap/faqs
_on_general_information_of_leap
SME Corporation:Box article : LEADING ENTREPRENEUR
ACCELERATOR Platform (LEAP) MARKET
https://www.smecorp.gov.my/images/SMEAR/latest/Chapter
6LEAPMarket.pdf
Malaysian Information Sources
• Bursa Malaysia
• http://www.bursamalaysia.com/market/

• Securities Commission
• http://www.sc.com.my/

12-22
 Pre-investment considerations for share investors
• Understand the main business activities the company is involved in.
• Review and monitor the performance of the company (at least 5 to 10 years)
• Find out more about the management of the company
• Exercise your voting rights
• This is if you are considering adding to your shareholding
• It is your right as the owner of an ordinary share to attend the annual
general meeting and pose the relevant questions or raise concerns to the
management on the running of the business of the company.
 6 May 2015

10 Mar 2020
7 Sept 2018

http://www.malaysiastock.biz/Corporate-Infomation.aspx?type=A&source=R&value=2-6&securityCode=3026
https://www.bursamalaysia.com/trade/trading_resources/listing_directory/company-profile?stock_code=3026
 https://www.malaysiastock.biz/Corporate-Infomation.aspx?securityCode=3026
Source : Dutch Lady Annual Report 2019
https://www.bursamalaysia.com/trade/trading_resources/listing_directory/company-profile?stock_code=4707
 As at 17 Sept 2021

https://www.malaysiastock.biz/Corporate-
Infomation.aspx?securityCode=4707
Source : Nestle Bhd Annual Report (2019)
https://www.malaysiastock.biz/Corporate-Infomation.aspx?securityCode=7113
Source : Top Glove Annual Report 2020
https://www.bursamalaysia.com/trade/trading_resources/listing_directory/company-profile?stock_code=4162
 Risks of investing in shares
• Market risk
• A systematic risk that affects all financial products (shares, bonds, derivatives etc)
that are listed in the capital markets
• Business risk
• Unique risk that affects the company itself e.g. change in leadership, new
competition, change in government regulations, legal claims made against the
company etc
• Liquidity risk
• Due to lack of free cash flow of company to meet its obligations
• Due to the lack of trading of shares
• Currency risk (for foreign shares)
• Financing risk
• Related to the use of high leverage by the company leading to a high default risk.
• At individual level, if one borrows money to invest→ Interest on loans are fixed but
there are no guarantees on return on shares → Could lead to insufficient cash
flow to meet loan payments.
 Valuation of share investments
• Dividend growth model
𝐷1
P* =
(𝑟𝑒 −𝑔)

• Discounted Cash Flow Method

• Value of Equity (VE) = Value of Assets (VA) - Value of Debt (VD)
• VA

• P* = Value of Equity (VE) / Number of Outstanding shares

• Relative/Multiple valuation methods

• Use multiples such as the P/E, P/B and P/S
 Measuring share investment returns
• Holding Period Returns (HPR)

HPR = (( End Share Price – Beginning Share Price) + Dividends) X 100

Beginning Share Price
Annualised HPR = [1 + HPR]1/n – 1 where n is the number of years

• Average rate of return

Average rate of return = ∑ HPR/ n where n is the number of data points

• Geometric mean return

Geometric mean return = [(1 + HPR1) (1 + HPR2) (1 + HPR3) ......... (1 + HPRn)]1/n – 1
where n is the number of data points
• Expected rate of return
Expected rate of return = ∑ (Possible Return i * Probability of returni)

• Real rate of return

Real rate of return = [(1+ nominal rate)/(1 + inflation rate)] – 1
 Factors that can have an impact on share prices
• Market imperfections
• Asymmetric information that will affect the supply and demand.

• Corporate exercises
• Bonus issues and share splits
• Rights issue
• Dividend signalling
• Mergers and acquisitions (M&A)

• Economic factors
• Example effects of movement in interest rates, inflation and foreign exchange
 Example : Bonus Issue
• Setia Berhad (“SB”) has 2,400,000 shares as at 31 December 2019. The management of
SB decides to give a 1 for 5 bonus issue (i.e. 1 free share for every 5 shares held)
• The price of a share before the bonus issue was RM1.65.
• How many shares will Setia Berhad have after the bonus issue exercise?
• What would be the theoretical ex-bonus issue share price?

Price per Share Total Value of

No of Share
(RM) Share (RM)
Market Value before Bonus Issue 2,400,000 1.65 3,960,000
New Bonus Issue Shares(= 2,400,000/5) 480,000
After Bonus Issue 2,880,000 3,960,000
Theoretical ex-bonus price 3,960,000 / 2,880,000 = RM1.38

Note : After the bonus issue, the number of shares have increased but the total value of the share remains the same.
36
Alternative : Ex-Bonus Issue Price
Need to have at least 5 shares to be entitled to 1 bonus share
Let’s say own 5,000 shares:
RM
Original holding : 5,000 shares x RM1.65 = 8,250
Add: Bonus issue: 1,000 shares x RM0.00 = ___0___
Ex Right 6,000 shares 8,250

Ex-Bonus Issue Price = 8,250/6,000 = RM1.38

 https://www.bursamalaysia.com/trade/trading_resources/listing_directory/company-profile?stock_code=1295
https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3120804
 Example : Rights issue
• On 30 June 2019, the Board of Directors Before rights issue
of Bersatu Tegas Berhad (“BTB”) Number of shares oustanding A 12,000,000
announced that it will be issuing a 1 for 5 Price per share (RM) B 2.50
rights issue.
Market value of shares oustanding C= A X B 30,000,000
• According to the prospectus, the rights
issue will be offered to shareholders Cash proceeds from rights issue (Assume full subscription)
registered on the books on 30 July 2019.
Number of rights for every share owned = D 1
• The subscription price of RM1.85 and the Number of rights needed to buy a share = E 5
last date to exercise the entitlement is 30
August 2019. Number of additional shares from rights issue F= (D/E) X A 2,400,000
Rights subscription price 1.85
• The market price per share just before the Cash raised from rights issue (RM) G 4,440,000
rights shares were issued was RM2.50.
• On 30 August 2019, BTB had 12,000,000 After rights issue
shares outstanding.
Total number of outstanding shares H= A + F 14,400,000
• Assume that the rights issue was fully Total value of oustanding shares (RM) I = C+G 34,440,000
subscribed. What would be the theoretical
ex-right price of BTB shares. Theorectical ex-rights price H/I 2.39
Alternative: Theoretical Ex-Right Price
Need to have at least 5 shares to be entitled to 1 right.
Let’s say own 5,000 shares and rights taken up in full:
RM
Original holding : 5,000 shares x RM2.50 = 12,500
Add: Rights issue: 1,000 shares x RM1.85 = 1,850
Ex Right 6,000 shares 14,350

Theoretical ex-right price = 14,350/6,000 = RM2.39

 Example : Share Split
• Raymond Lee has 4,500 shares of KLB Berhad currently trading at RM2.58
per share. The company just announced a 3 for 1 share split.
• Total value of Raymond Lee’s investment before the share split
= 4,500 X RM2.58 = RM11,610
• Number of shares after the share split
= 3 X 4,500 = 13,500 shares
• Share price after the share split
= RM 11,610/13,500 = RM0.86/share (1/3 of original value)
• Share splits will lower the value per share, increase the number of shares to
the investors but will not change the total value of the equity to the company.
• Reverse share splits will have the effect of increasing the value of the share.
 Methods of share investing
• Fundamental versus technical analysis
• Fundamental investing – focus on key drivers of growth in a company to determine the intrinsic value
of the shares of a company
• Technical analysis - operates on the belief that the fundamentals of a company are already reflected
in the current share price and trading volumes
• Dollar cost averaging
• Involves making the same amount of investment at regular intervals of time (for example end of
every month or year)
• Share margin trading (Speculative)
• Share margin trading involves an investor borrowing money to buy shares.
• It is speculative because the loan outstanding needs to be paid on time whereas there are no guarantees on the
returns of shares that one has invested in.
• Short selling of shares (Speculative)
• Short selling of shares involves borrowing of shares (usually from a brokerage house) and selling them now with
the hope of buying them back at a later time to cover the shares borrowed.
 Behavioral aspects of share investments
• In reality, people are often irrational and decision making is a function of
psychology, sociology and emotions.

• Basic instinct of fear and greed insidiously affects human judgements in investing

• The market comprises among others active, passive, intuitive and speculative
who all hold and act based on a myriad of beliefs and perceptions which are
somehow reflected in the share price.
 Behavioural theories and biases
• Loss aversion
• Prospect theory posits that investors tend to be more negative towards losses than
the similar quantum of gains
• Availability bias
• Causes one to assign higher probabilities to an event based on ease of recall.
• Representative bias
• Stereotyping bias.
• Anchoring bias
• Human tendency to make decisions based on an implicit reference point or rule of
thumb even though there is no logical basis for this
• Framing Effect
• The way the information is presented will affect the recipient’s evaluation process
and decisions.
 Behavioural theories and biases (cont/…)
• Mental Accounting
• People often unconsciously think within the box.
• This violates the principle of fungibility
• Herding behaviour and overconfidence
• Herding behaviour happens when individual investors irrationally subscribe
and mimics the behaviours of the crowd and ignore fundamentals.
• Overconfidence happens when investors often take bad bets as they fail to
realize they are at an informational disadvantage . This over-optimism could
lead to excessive trading.
• Gambler’s fallacy and speculation
• Use small number of data points to predict future probabilities
 Buying and Selling Shares

Primary market Secondary Market

• Initial Public Offering (IPO)
• Usually the IPO will be underwritten by an
investment bank
• Traded among investors via brokers and
dealers
• Securities exchanges - Marketplace where
members, representing investors, meet to
buy and sell securities

• Over-the-counter markets- Network of

dealers (Market Makers) who buy and sell
the stocks of companies that are not listed
on the stock exchange
 Short-Term Investment Strategies
• Trading in options
• Option = the right but not the obligation to buy or sell a stock at a predetermined
price during a specified period of time
• Call option
• Right to buy
• “Bullish”
• Put option
• Right to sell
• “Bearish”
• Not for amateurs or beginning investors
 Regulated Short Selling (RSS) and Intraday Short Selling (IDSS)

https://www.bursamalaysia.com/sites/5d809dcf39fba22790cad230/assets/60c2d7c139fba27932870e2e/Directive_on_the_List_of_Approved_Securities.pdf