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2043 TOPIC 4 Bonds (new) - 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 . It is called fixed income securities because investors will be paid a fixed coupon payment – you know in advance when you will receive the coupon payment and how much. Returns on Bonds include : i. Regular income – coupon ii. Capital gain 1
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CHARACTERISTICS OF BONDS a. Nominal Value(Par Value) The nominal value is the par or face value. Also known as the principal value which is the amount that the issuer agreed to repay the bondholder at the maturity date. b . Coupon Rate Is the nominal interest rate that determines the actual interest the bondholder receives on owning the bond. Payable annually, half yearly, or quarterly however, half yearly is most popular c. Terms to maturity Is the no. of years over which the issuer of the bond has promised to meet the conditions and obligation of the bond issue. During this time the bondholder is paid the promised coupon payment It also indicates the remaining life of the bond. Maturity of the bond is the date the bond will cease to exist, at which time the issuer will pay back to the bondholders, the principal. d. Yield-to-maturity Is the indicated(promised) compounded rate of return an investor will investor will receive from a bond purchase at the current market price and held to maturity. Is the effective interest rate earned on the bond investment. 2
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Prices of bonds are quoted in relation to their yield. e . Call Provision Entitles the issuer to redeem or call the bonds from their holders. Investors will receive some compensation for the risk that the bond will be called away. The investor will then be subjected to re-investment risk. f. Sinking Fund Money put aside by the issuer periodically for the eventual repayment of the debt. Ensures enough money to redeem the bond upon maturity. Advantages vs Disadvantages of bonds To Issuing Firm: Advantages Disadvantages a) Tax deduction of interest payment Coupon payments to bondholders are tax- deductible for the issuing firm b) Increase in earnings per share Since a bond is a fixed-income security, the surplus earnings available to shareholders after deducting interest payment to bondholders during good times would be higher.
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