1.1 WHAT IS BOND?
In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity. Interest is usually payable at fixed intervals (semi-annual, annual, and sometimes monthly). Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary market. Thus a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or short term commercial paper are considered to be money market instruments and not bonds: the main difference is in the length of the term of the instrument. Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (i.e. they are owners), whereas bondholders have a creditor stake in the company (i.e. they are lenders). Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is an irredeemable bond, such as Consols, which is a perpetuity, i.e. a bond with no maturity.
1.2 A BRIEF PROFILE OF MALAYSIA BOND MARKET
The bond market in Malaysia has developed significantly in terms of market size, range of instruments and efficiency. The development of the bond market centres on the need to establish a well-diversified financial base to meet the changing needs of the Malaysian economy. Concerted measures to develop the bond market were taken by the Government, and success of these efforts are reflected in the significant growth of the bond market, marking Malaysian bond market as one of the fastest growing bond markets in Asia. Among the recent key initiatives are:
* The Government first issued its inaugural Callable MGS 5NC3 in December 2006; * The Government introduced switch auction in January 2007 to improve the overall market liquidity by replacing the off-the-run MGS with the on-the-run MGS; * The Government first issued its inaugural Callable MGS 5NC3 in December 2006; * Bank Negara Malaysia issues its first Sukuk Ijarah Notes in February 2006, as an additional tool to manage liquidity in the banking system; * Bank Negara Malaysia issued the inaugural Bank Negara Monetary Notes (BNMNs) to replace the Bank Negara Bills and Bank Negara Negotiable Notes in December 2006. BNMNs can be issued on discount-to-value, fixed-rate or floating rate coupon bearing bonds. In July 2007, the first floating rate BNMN was issued.
As at end-Dec 2010, the size of the bond market reached RM763.4 billion, approximately 97% of GDP. The bond market has a balance mix of both public sector and private sector bonds, each contributing 45% and 55% share of the total outstanding bond respectively. Today, the corporate bond market makes up approximately a quarter of the total debt financing (including bank loans) to the economy compared with around 10% in 1997. Such rapid growth is a reflection of the expanding private sector financing needs, especially the considerable infrastructure development needs in Malaysia, which require more long-term financing, have provided a strong impetus to the market. A wide variety of debt securities products are available in the Malaysian bond market, such as fixed coupon bearing bonds, floaters, asset-backed securities, convertible bonds, callable bonds, etc. Bond issuers include, among others, the Government of Malaysia, Bank Negara Malaysia, quasi government institutions, corporations as well as...