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Unit 3
Unit 3
BBF 303/05
MALAYSIAN DEBT
MARKET
3.1 Debt
Securities
Classification of debt securities
Debt securities
Short-term
Long-term
-Cagamas Notes
-Malaysian Treasury Bills
-Government Investment
certificates
-Malaysian Islamic Treasury Bills
-Malaysian Government
Securities (MGS)
-Cagamas bonds
-Corporate bonds
-Khazanah bonds
-Government Investment
Issues
-Sukuk BNM Issues
What is Bond ?
A bond is a long-term debt instrument that pays the bondholder
a specified amount of periodic interest rate over a specified
period of time.
The bonds principal or par value is the amount borrowed by
the company and the amount owed to the bondholder on the
maturity date.
The bonds maturity date is the time at which a bond becomes
due and the principal must be repaid.
Yield curve
A yield curve (Figure 3.3) graphically shows
the relationship between the time to
maturity and bond yields in a given risk
class. In general, the longer the bonds
maturity, the higher the interest rate (or
cost) to the firm.
There are three general types of yield curve:
Downward sloping
Upward sloping
Flat
Yield-to-Maturity (%)
Downward-sloping
10
Flat
Upward-sloping
4
Figure 3.3 Yield curve
10
15
Time-to-Maturity (years)
Yield Curve
Downward sloping: long-term borrowing costs are expected to be lower
than short-term borrowing costs. This curve reflects a general
expectation for an economic recovery from a crisis due to inflation
coming under government control and a stimulating impact on the
economy from the lower rates from fiscal and monetary policies.
Flat: Borrowing costs are expected to be relatively similar for shortand long-term loans.
Call feature
A call feature, which is included in most
corporate issues, gives the issuer an
opportunity to repurchase the bond
prior to maturity at the call price.
Government
The main issuers of public debt
securities
in
the
Malaysia's
local
currency bond market are the Bank
Negara Malaysia (BNM) and quasigovernment institutions, for instances,
Cagamas and Khazanah. These bonds
are issued based on conventional or
Islamic principles.
Investors
Normally, retail investors invest for their personal financial goals, for
instance, retirement, house, and properties. Institutional investors are paid to
manage other peoples money. They affect the investing environment through
their actions of buying and selling securities in large quantity in a market.
Both retail and institutional investors may invest in Malaysia's local currency
bond market. However, most of the investors in Malaysia's local currency
bond market are institutional investors whom have large sums of capital, for
instance, pension fund, financial institutions, insurance companies, and asset
management companies.
Employee Provident Fund (EPF) is the major shareholder for Malaysian
Government Securities (MGS) and banks, finance companies, and insurance
institutions are the major investors for Malaysian Treasury Bills. 30 per cent
of EPFs assets are required to be invested in MGS and this accounts for over
85 per cent of the total assets of the
Malaysian provident fund system. For the quasi-government bonds, Bank
Negara Malaysia (BNM) is the biggest shareholder of Cagamas bonds, which
are also held by commercial banks, finance companies, and merchant banks.
Intermediaries
Intermediaries are those who are involved in
the issuance, sale, and trade of debt
securities in the primary and secondary
markets, for example, fund managers,
brokers,
Rating Agencies
Government and government-guaranteed debt securities are exempted
from being rated by rating agencies.
To have greater access to the Malaysian capital market, the Securities
Commission made an announcement on March 2009 that the mandatory
credit rating requirement is also exempted for convertible and
exchangeable bonds as well as sukuk issues.
In other words, Government, government-guaranteed debt securities,
convertible and exchangeable bonds as well as sukuk issues are exempted
from being rated while all private debt securities must be rated by the
recognised rating agencies.
Currently, there are two rating agencies recognised by the Securities
Commission (SC), namely, RAM Rating Services Berhad (RAM Rating)
and Malaysian Rating Corporation Berhad (MARC).
RAM was the first rating agency in the ASEAN region set up in 1990 and
MARC was launched in 1995.
Objective of bonds
The primary objectives of issuing government
securities are:
1. To provide investment opportunities to the
Employees Provident Fund (EPF), local banks and
insurance companies.
2. To finance the public sectors expenditure on
development.
3. To fund the Governments budget deficit and
prepayment of Governments external loans.
4. To allow Islamic banks to hold liquid papers that
meet their statutory liquidity requirements and
invest in securities that are issued based on
Shariah compliant concept.
Advantages
Elimination of default or bankruptcy risk
Minimization of call risk
Bonds are more liquid
Disadvantages
Lower rates of return
Exposure to inflation risk
are
quasi-government bonds.
Rating agencies in
Malaysia
Currently, there are two rating agencies recognized by the
Securities Commission (SC), RAM Rating Services Berhad
(RAM Rating) and Malaysian Rating Corporation Berhad
(MARC).
RAM was the first rating agency set up in 1990 to provide
credit-rating services for the Malaysian capital market.
MARC was incorporated in 1995 to undertake ratings of
corporates and corporate debt issues, including Islamic
capital market instruments, asset-backed securities, as
well as financial strength ratings of financial institutions
and insurance companies.
Bond valuation
The bond price is calculate as the present value
of its coupons payments over a specific period
and the principle repayment payable at maturity.
The market interest rate is used to be the
discount rate for that issue.
1. Coupon rate
a. Coupon bond
i.
ii.
2. Price
a. Par
A bond sells at par value when the required return of investors
equals the coupon rate and this normally applies to newly issue
bond.
b. Premium
A bond sells at a premium when the required return of investors is
less
than coupon rate or when the price of the bond is above its
face value.
c. Discount
A bond sells at a discount when the required return of investors
exceeds the coupon rate or when a bond price is below its par.
3. Maturity
4. Redemption features
a. Call feature.
5. Credit quality
a. Government issues.
Sovereign risk is the probability that a country defaults
on its obligations to comply with the terms of loans.
Generally, all
government issues are free from
sovereign risk.
b. Private debt securities.
For Malaysia, private bonds are rated by RAM or/and
MARC. Bonds with higher credit quality (AAA) are
generally more
expensive than the lower credit
quality (D).
6. Yield
Thank you
Prepared by KL Tan