Download Bond - InvestSmart

How investors are protected
Malaysia emphasises on the need for regulatory safety
nets designed to protect investors from unethical
and unscrupulous practices. Any misconduct in the
securities industry can be reported directly to :
Investor Affairs & Complaints Department
Securities Commission Malaysia
3 Persiaran Bukit Kiara
Bukit Kiara, 50490 Kuala Lumpur
Tel
: 03 6204 8999
Fax
: 03 6204 8991
E-mail : [email protected]
Always remember that purchasing bonds are just like
any other investment products, with risks and stakes
involved. Now that you know the basics of bonds well
enough, you can take the next step and purchase
your bonds wisely.
Bond :
Mission To Invest
Securities Industry Development Corporation
3, Persiaran Bukit Kiara, 50490 Kuala Lumpur
Tel : 03 6204 8889 Fax : 03 6204 8298
www.min.com.my
About Us
SECURITIES INDUSTRY DEVELOPMENT CORPORATION
(SIDC), the leading capital markets education,
training and information resource provider in ASEAN,
is the training and development arm of the Securities
Commission, Malaysia (SC). It was established in 1994
and incorporated in 2007.
SIDC has been delivering professional excellence for
more than 15 years. We organise training programmes
for Malaysian and foreign regulators, company
directors and market professionals as well as conduct
public investor education seminars on wise investing
and investors’ rights.
We develop and facilitate training both locally and
internationally through a range of programmes and
activities, including conferences, seminars, and
workshops. In collaboration with the SC, we develop
examination questions and modules and conduct
licensing examinations as part of the licensing regime
for Malaysian capital market intermediaries.
Bond:
Mission
To Invest
Investing is a whole exciting adventure on its own. It is no doubt
thrilling with beneficial returns but is also a rather challenging topic to
master. With so many investment products to choose from, even the
most seasoned investors face challenges in managing their portfolio
every now and then. Though the Malaysian capital market offers a rich
variety of investment products, investors usually stick to the more
familiar products such as shares and unit trusts. As an investor, it is wise
to diversify your portfolio with different types of investment products.
Take time to know your products first before investing. At the end of
this leaflet, you will be able to identify the characteristics of bonds
and the various details on how and why you should invest in them.
Bond funds
For more information,
visit www.sidc.com.my and
www.min.com.my.
Copyright strictly reserved© SECURITIES INDUSTRY DEVELOPMENT CORPORATION
1
“ understand
before
you invest
“
This financial literacy programme is supported by
Capital Market Development Fund (CMDF).
As an investor, you might be more familiar with
the term bond funds (unit trusts that invests in
bonds). A bond fund is basically a fund that
invests collectively in bonds or other debt
instruments. To further understand how
investments in bond funds work, you will need to
take a closer look at what builds that fund, in
this case, bonds itself. It is also important for you
to know and understand more about bond funds
so that you have a clear understanding on the
type of investments your money is going into.
2
Investors such as you will then lend these companies money by
purchasing the issued bonds, and after a certain period, the
company will pay back the amount borrowed. While waiting for the
end of that period, the company will regularly pay you interest at
a predetermined interest rate also referred to as coupon.
[ Issuer pays periodic interest ]
[ Project generates income ]
4
3
So,
what are
bonds?
Investors /
Lenders
A bond is a certificate or security showing that the investor
has loaned funds to a company or to a government in return
for fixed future interest income and repayment of principal.
Let us look at it from a lighter view. When you are in need
of a large sum of money, one of the easiest ways to fulfill
your fund is by taking up a loan. Huge companies (and even
the government too) sometimes need to take loans to fund
their projects and ambitions but the funds they need
usually out scale the amount that banks are able to offer.
So the best way for them to gather their funds is by issuing
bonds for the public.
3
Bond Issuers /
Borrowers
Projects /
Developments
1
2
[ Invest / lend funds ]
[ Funds being used for]
Some of the corporate bonds (in the form of loan stocks) in
Malaysia are listed on Bursa Malaysia. However, most of these
instruments are issued on a private placement basis and are
traded on the over-the-counter (OTC) basis. As these bonds are
issued without prospectus, the instruments could only be issued
or offered to a restricted list of investors as specified under the
Capital Market & Services Act 2007 (CMSA). For instance, such
bonds could only be offered to individual investors with high
networth of RM3 million or above.
4
Bond terms and characteristics
There are several specific terms and characteristics of bonds
that you should be familiar with, as listed below :
Nominal value
The amount that the issuer has agreed to
pay the bond holder at maturity date.
Yield
The discount rate or interest rate that an
investor wants from investing in a bond.
The yield is not the same as the coupon
rate of a bond.
It can also be known as face value,
par value, redemption value or maturity value.
Coupon rate
The amount of interest the bond holder
will receive at regular intervals, also known
as coupon payment.
E.g. : If you own a RM100,000 bond with a
coupon rate of 7%, the annual interest
payment is :
RM100,000 x 7% = RM7,000
Term to maturity
The number of years leading up to the
date when the issuer will repay the
bond holder’s principal investment.
Trust deed
A legal agreement detailing the issuer’s
obligations related to the bond issue.
Trustee
The third party with whom the
trust deed is made.
The trustee’s role is to ensure that the
terms and conditions of the trust deed
are carried out.
Type of issuer
5
Price of bonds are quoted in relation to their
yields. As the required yield increases,
the price of the bond decreases.
The reverse is also true.
The issuer of a bond is a key feature to
consider when choosing bonds to invest in.
In Malaysia, the issuers of bonds can be
the government, banks, financial institutions
and companies.
Call provision
Entitles the issuer to repurchase or “call”
the bond from their holders at a stated
price within a predetermined period.
Sinking fund
In a sinking fund bond, the issuer periodically
puts aside money for the eventual repayment
of the debt. This provision may be included
in the bond trust deed to protect investors.
What are the advantages and
disadvantages of investing in bonds?
Advantages
Disadvantages
Annual fixed interest income
(regardless of the company’s
performance)
Bond holders will not be
paid higher if the company
does well as opposed to
ordinary shareholders
Bond holders have higher
precedence over ordinary
shareholders on distribution
of earnings
Bond holders have no
voting rights
6
The difference between investing in
bonds and investing in shares
Though bonds are used as a trading instrument as well as shares,
there are several prominent differences between the two.
Below is a table comparing bonds and shares :
Bonds
Stocks
Bonds are debt
Stocks are equity
When you purchase a bond,
you become a creditor to
the company
When you purchase a stock,
you own part of the
company
Bonds have a maturity date
Shares last as long as the
company
Returns on a bond are
predetermined
Returns on shares depend
on the company’s performance
Are bonds risk free?
Like all investments, investing in bonds carry certain risks too. Among
the risks, two of the most notable are credit and interest rate risk.
• Credit risk
Credit risk is when the issuer fails to pay the coupons or is unable to
return your principal upon maturity. In general, bonds that are
considered as the least risky would be bonds that are issued by the
Government.
• Interest-rate risk
Interest-rate risk is also called price risk or market risk. It refers to
the possibility that income and/or capital loss will occur because a
change in the level of interest rates consequently affects bond price.
Bonds are approved by the Securities Commission Malaysia (SC) under the
disclosure-based regulation (DBR) and investors should make informed
decision through relevant information disclosed by issuers, transaction
documents and other current information related to the issuers.
7
Why should I invest in bonds since
they have risks too?
If you are among those who cannot stomach the volatility of the stock
market, then give bonds a try. For an investor that has multiple high risk
products in their portfolio, it is advisable to include bonds to provide a
certain degree of stability.
What are the different types of bonds
The classification of bonds follow their maturity terms which are :
Long term
Have tenures of not less than one year
but the most common tenure is five years
Short term
Maturity of less than one year
Another way to classify bonds would be :
Conventional
bonds
Tradable financial instruments issued by
company or corporation whenever it wishes
to borrow money
Islamic bonds
(sukuk)
Structured to comply with Islamic law and
its investment principles
8
Selecting a bond
There are five important factors to consider when selecting a bond.
Bond rating
Measures the investment quality of the bond
Length of maturity
Indicates how much an investor may stand to
lose if interest rates rise
Bond features
(call or conversion)
Investors need to identify if their bonds have
the additional feature of a call provision or a
convertibility feature
A “called” bond means that the bond holder
is generally paid a small premium over the
bond’s nominal value.
A convertible bond enables the investor to
change the bond to an ordinary share within
a specified time period
Tax status
Yield to maturity
In Malaysia, there is a tax exemption on
interest earned by individuals investing in
bonds
It takes into account the current coupon
income and any capital gain or loss that the
investor will get by holding the bond to
maturity
How to read bond ratings
Bonds are rated according to the issuing company’s ability to meet its
periodic commitments. Rating agencies, not linked to any corporations
issuing bonds, will analyze and provide the rating scale of bonds.
In Malaysia, there are two privately owned independant rating
agencies namely Rating Agency Malaysia Bhd (RAM), which was
established in 1990 and the Malaysian Rating Corporation Bhd (MARC),
established in 1995.
To find out more about these ratings, do visit their respective websites at :
RAM : www.ram.com.my
MARC : www.marc.com.my
9
Price Transparency
Transacted prices for unlisted or OTC bonds can be viewed on daily basis
through the Bursa’s Electronic Trading Platform (ETP). The ETP is the
centralised price and trade repository and dissemination for the primary
and secondary bond market. It is an efficient and facilitative market
control system for Bursa Malaysia to supervise the bond market.
There are also bond valuations made available by the Bond Pricing Agency.
The Bond Pricing Agency (BPAM) is an initiative by the Securities Commission
of Malaysia to further boost the transparency and quality of price discovery
mechanisms and valuation practices in the Malaysia bond market.
To find out more, do visit their respective websites at :
Bursa : http://www.bursamalaysia.com/website/bm/trading/bonds/
BPAM : http://www.bpam.com.my/
Are investors’ rights protected when the
debtor is unable to pay its debt?
Bond holders’ rights are protected under the Companies Act 1965 and
CMSA.
Under the Companies Act, creditors, including bondholders, can file a
winding-up petition for a company when the debtor is unable to pay its
debts. When a winding-up order is made, the court appoints a liquidator
who oversees the liquidation process.
Under the CMSA, all bond issuers are required to enter into a trust deed
with an appointed trustee. The trust deed contains bond provisions,
covenants, and other requirements set by the SC. The trustee's role is to
safeguard the interests of the bondholders as set out in the trust deed
and in the CMSA.
Bond documents (e.g., prospectus, term sheets, information
memoradum) also contain covenants and relevant default clauses
specific to the bond issue that provide additional protection to
bondholders. The SC's web site provides copies of term sheets and/or
principal terms and conditions of bond issuances.
10