Bond Introduction

BONDS

Introduction

Bonds type instruments are long-term debt instruments with original maturity longer than a year. They are issued by either the governments to finance fiscal deficit as well as corporations to finance projects, which require large sum of immediate cash. Unlike short term debt instruments described in Chapter 1, bonds pays periodic coupon interest to the bondholders.

Features

A bond basically has the following features:

  1. Issuer - This is the borrower issuing the debt instruments;
  2. Face Value - This is the amount the issuer will be paying on maturity. It is also the amount used to calculate the interest amount payable to the debt holder;
  3. Coupon – The coupon rate is used to calculate the periodic interest to be paid on coupon payment date. An exception to this is zero coupon bond;
  4. Interest Payment Frequency – This states the frequency of the coupon interest payment. Semiannual interest payment is the most common interest payment frequency;
  5. Maturity – This is the date the face value amount and the last coupon interest payment are made. Only perpetual bond does not have maturity. In Malaysia, bonds with original maturity of 50 years are often referred to as perpetual bond although technically it is not;
  6. Day Count Convention – This is the convention used for calculation of accrued interest and interest amount to be paid on coupon payment date. Bonds in Malaysia typically uses Actual/365 or Actual/Actual;
  7. Callable – some bonds are callable, which means that the issuer has the right to redeem the bond at a predetermined price. Call dates often coincide with coupon payment dates. Schedule of the call dates and redemption prices are often provided in the memorandum of issuance.Callable bonds are generally issued by banks as sub-ordinated debt which increases the banks capital required for business expansion; and
  8. Puttable – some bond are puttable, which means that the debt holder has the right to sell the bond to the issuer. Such bond is non-existent in the Malaysian market.

The Malaysian government issued coupon bearing bonds known as Malaysian Government Securities (MGS) which pays semiannual coupon. Coupon interest convention is Actual/Actual with no adjustment made to the interest calculation even if the coupon date falls on a holiday. Coupon payment, however, will be adjusted to the next business day in cases where the date falls on a holiday. Purchase of a new MGS issue is done by tender through FAST (Fully Automated System for Issuing/Tendering) submitted via principal dealers (PDs) appointed by BNM. Announcement for any MGS issuance is done a few days prior to the tender/issue date. Upon an announcement, the MGS will be available for trading for value spot from issue date and the trading will in terms of yield until the tender result is announced and the coupon rate known.