2043 TOPIC 4 Bonds (1) - TOPIC 4 BONDS(1 FIXED INCOME...

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TOPIC 4: BONDS (1) FIXED INCOME SECURITIES Reference : Malaysia Bond Market Guide Bond Market The bond market (also known as the debt , credit , or fixed income market ) is a financial market where participants buy and sell debt securities, usually in the form of bonds . The bond market provide another avenue for governments or corporations to raise capital . Essentially, bonds are debts or loans and when a bond is issued, it means the issuer (government or corporation) is borrowing a specified amount of money from the investor for a specified period of time . Bond Issuer i. Bonds issued by Government/Government Agencies Purpose to raise short and long term funding for business and development activities eg. KLIA Bonds. Government Bonds issued are basically “risk free”- i.e free of credit risk. However, they are still subjected to market risk. The risk of default is fully guaranteed by the Government Government bonds are known as Malaysian Government Securities (MGS) or sovereign bonds. ii. Bonds issued by private entities or companies: Purpose to help finance their ongoing business activities. 1
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An alternative instrument to issue of equity or preference shares. to increase of financial leverage (used borrowed funds to improve its return on investment) an incentive of tax deductible (helps to reduce the amount of tax on the company profits) Investor Are Instituitional Clients because bonds in Malaysia are sold in lots of RM5 mil. face value. Financial instututions and non-financial insitutions buy government bonds because it is required by law – be it for purposes of diversification, low risk assets or to assist government in its monetary policy. Example: FIs and Non- FIs Banks Insurance Companies Unit Trust Companies Employee Provident Fund (EPF) Kump. Wang Amanah Pencen(KWAP) Social Security Organisation (SOCSO) PETRONAS Tabung Haji Lembaga Tabung Angkatan Tentera How a Bond Traded? Primary Market : When the issuer (government or corporations or institutions) first offers new issues, that first trading is done at the primary market. 2
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this means is that the issuer is able to raise funds for its use and the money raised from the sale of the bonds come directly to the issuer. Secondary Market Subsequently, the bonds bought from the issuer can be bought and sold among other investors, and this is referred to as the secondary market . The secondary market provides liquidity to institutions that have acquired the bonds, which are now able to sell off the bonds before the maturity date, should they wish to do so. The trading of bonds in the secondary market creates a market pricing of the bonds that depends on the supply and demand of the bonds, and prevailing interest rates, among other factors.
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