An Introduction to the Malaysian Bond Market
INTRODUCTION
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
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
References: (1.1) http://en.wikipedia.org/wiki/Bond_(finance) (1.2)http://bondinfo.bnm.gov.my/portal/server.pt?open=514&objID=27275&parentname=MyPage&parentid=0&mode=2 (1.3) http://www.sc.com.my/main.asp?pageid=261&menuid=350&newsid=&linkid=&type= Bank Negara Malaysia (1999): “The central bank and the financial system in Malaysia: a decade of change 1989-99”. The Securities Commission (2004): “Capital market development in Malaysia: history and perspectives”. International Monetary Fund (2005): Global Financial Stability Report, September. Rating Agency Malaysia (2005): “Special Report: 2004 corporate default and rating transition study”, April.