Chemical bond is a fixed income securities issued by company who requires fund or capital. Peoples who buys bond are the investors or the excess unit. Organizations who issue or sell bond are the shortage unit or demander of fund. When these investors purchase the bond, they are anticipating return from the bond issuer in term of involvement payment at adulthood day of the month which would be in the hereafter. The involvement rate is referred as voucher, and the day of the month which the issuer has to refund the sum borrowed is known as face value. Most bonds have adulthood transcending 1 twelvemonth because it categorized under capital market where it involves long term investing. Bond is known as fixed income securities because the investors would cognize the exact sum of hard currency they would have if they hold the security until adulthood.
Investors normally will put in bond for their portfolio variegation to minimise hazard. Bond as against stock, the return is somewhat lower compared to stock return during bull market. But during bear market, investors would be grateful of holding bond in their investing portfolio as because bond ‘s greater safety and stableness compared to stock market.
During recession, the involvement rates will diminish. A lessening in involvement rate would take to an addition in monetary value of bond. An addition in monetary value of bond would intend the expected return of bond would be higher. This is because monetary value of bond and involvement rates are negatively correlated.
1.1 What is Chemical bond Market?
Chemical bond market is a fiscal market where bonds are traded. Chemical bonds are normally traded nonprescription or through electronic trading webs. Chemical bonds are normally composed of the primary and secondary market. The bond market is many times bigger than the stock market and is critical to the on-going operation of the public and private sector. Chemical bond market is rather different from the stock, hereafters and options markets, most of the trading volume in bond markets takes topographic point between agents and big fiscal establishments.
1.2 Type of Bond
Chemical bonds are classified in several classs. In the general construct of bonds categorization, bonds are categorized as authorities bond, corporate bond and exchangeable bond.
Government bond are normally the less hazardous as it is the most secured and supply high return. Government bond as its name is issued by authorities to private sector or fiscal establishments for raising fund to finance domestic capital and for authorities disbursement and outgo in respect towards state ‘s development. Government bonds are normally graded AAA as it is to the full backed by the Central Bank
Corporate bond is a long term debt of the corporation. A corporation publishing bond is selling its recognition to the person or establishment that is willing to impart money by puting in its debt securities. Corporation who issue bond is to obtain fund to finance its daily operation. A company can publish bonds merely as it can publish stock. Large corporations have a batch of flexibleness as to how much debt they can publish. Generally, a short-run corporate bond is less than five old ages and long term is over 12 old ages. Corporate bonds are associated with higher output because the opportunities of company confronting default is greater compared to authorities bond. However, corporate bond can besides supply great wages due to its greater hazard the investors must take.
Convertible bond on the other manus permits the proprietor to change over the security into common stock. These exchangeable bonds carry a claim on the common stock of the same issue which is exercisable at the proprietor ‘s enterprise. Company issue exchangeable bond is to minimise the negative reading of the investors of its corporate actions. An illustration obtain from one of the resource, it provide an overview if an already publicA company chooses to publish stock, the market normally interprets this as a mark that the company ‘s portion monetary value is slightly overvalued. To avoid this negative feeling, the company may take to publish exchangeable bonds, which bondholders will probably change over to equity anyhow should the company go on to make good
1.2.1 Type of Malayan Chemical bond
Malayan bond consist of authorities bond and corporate bond. Below are the inside informations of each bond as obtained from the Securities Commision ;
1. Government Chemical bond
Malayan authorities ( facilitated by Bank Negara )
Chemical bond Classs:
1. Malayan Treasury Bills ( MTB )
2. Malayan Government Securities ( MGS )
3. Government Investment Issues ( GII )
4. Monetary Notes
Chemical bond Classs:
1. Bank Negara Monetary Notes ( BNMN )
2. Bon Simpanan Merdeka
2. Corporate Chemical bond
Cagamas ( national mortgage corporation that issues asset-backed securities )
Chemical bond Classs:
1. Cagamas notes
2. Cagamas bonds
3. Islamic Cagamas bonds
Khazanah Nasional ( investing keeping weaponries of the Government of Malaysia )
Chemical bond Classs:
1. Khazanah Bonds
Corporations ( such as Tenaga Nasional and others )
Chemical bond Classs:
1. Commercial Documents
2. Average Term Notes
3. Corporate Bonds/Private Debt Securities
Malayan Government Securities ( MGS )
MGS is a marketable debt instrument issued by the authorities to raise fund for domestic capital market to finance authorities ‘s development outgo and working capital. It requires a lower limit of 10 % commands in multiple of MYR.
Bank Negara Monetary Note ( BNMN )
It is securities issued by Bank Negara Malaysia replacing the bing Bank Negara Bills for the intent of pull offing liquidness in the conventional fiscal market. It has adulthood from 1 twelvemonth to 3 old ages. It may be issued either on a discounted or voucher bearing footing.
It is issued by Khazanah National Berhad. Khazanah bond is an investing keeping arm of the authorities of Malaysia. It is guaranteed by the authorities.
Government Investment Issue
It is a long term authorities securities with no involvement. It is issued based on Islamic rules by authorities. It is issued to let Islamic Bankss to keep liquidness documents to run into their statutory liquidness demands as specified by the Central Bank.
Cagamas bond mission is to supply fiscal merchandise and services peculiarly to take down income group to better the handiness of loans for the purchase of place. Cagamas borrows money from publishing debt securities and utilize the fund to finance the purchase of lodging loan from authorities, fiscal establishments and selected corporations. There are four types of cagamas bonds which include Cagamas Fixed Rate Bond, Cagamas Floating Rate Bond, Cagamas Note and Sanadat Mudharabah Cagamas.
1.3 Characteristic of Bond
All the features of bond dramas an of import functions in finding the valur of the bond and how good it can suit with the investors portfolio.
Coupon rate ( involvement and principal )
Chemical bond issues are considered to be fixed income securities because the debt service duties of the issuer are fixed. The publishing company agrees to pay a fixed sum of periodic involvement to the bondholder and to refund a fixed sum of principal at or before adulthood. A bondholder return is limited to this fixed involvement and chief payments therefore affecting a fixed claim on the issuer ‘s income and on the assets of the issuer. Bond pays involvement every 6 months. However, there are besides bond that pays involvement every bit abruptly as a month and a few every bit long as a twelvemonth.
Face value or Par value
The face value or besides known as the par value is the sum of money a holder will have at adulthood. A freshly issued bond usually sells at par value. Par value is non the monetary value of bond. A bond ‘s monetary value fluctuates throughout its life in response to a figure of variables. A bond is said to be selling at a premium when the bond is trade at a monetary value above the face value. When the bond is selling at below face value, it is said to selling at a price reduction.
Most debt securities have limited lives and expires on a given adulthood day of the month. Bond ‘s adulthood day of the month is fixed. Therefore, it does non merely specify the lives of new issues but mean the sum of staying for older or outstanding bonds every bit good. Two type of bond can be distinguished on the footing of many term and consecutive. A term bond has individual, reasonably drawn-out, adulthood day of the month. A consecutive bond on the other manus has a series of different adulthood day of the months such as 15 or 20 within a individual issue. At each of these adulthood day of the months, a certain part of the issue would come due and be paid off.
2.0 Participants of Chemical bond market
a. Fiscal Institutions
Consists of commercial Bankss and investings Bankss
B. Chief Traders
It is selected by Bank Negara Malaysia from banking establishment based on the handiness to manage big dealing.
c. Money Agents
They are in charge of set uping trades between two or more interbank establishments every bit good as between banking establishments and foreign counterparties in the international money market.
d. Shariah Advisory Council
They guarantee all Islamic capital market are in conformity with shariah rules. For illustration like the issue of Sukuk bond
e. Rating Agencies
They provide independent sentiment on the recognition hazard and possible default hazard of specific issuer. They rate all of the private debt available on the market to be issued. Example like RAM and MARC
3.0 Advantages and Disadvantages of Bond
a. Chemical bond is said to be predictable. The investors would cognize how much involvement they would gain upon adulthood. They would besides cognize how frequently they will have the involvement either every month, 6 months or yearly. They would besides hold cognition on when their principal would be repaid
B. Chemical bond is of course more stable than stocks. Its fluctuation is wildly short term. Investors would be secured during recession as bond provides greater return compared to stocks.
c. Peoples on fixed income or retirement will have a predictable sum of regular income from bonds
d. The involvement rate given by bonds is greater than those involvement paid by Bankss on nest eggs account
a. Companies can travel bankrupt and if it does happen, investors can lose the bond value and the bond can even go worthless
B. If involvement goes up, long term bond will hold the investors money tied up in low giving up bonds
c. Unlike stocks, bonds do n’t offer the possibility of high long-run returns. Younger investors and those with several old ages to travel until retirement would be better served by restricting their bond purchases and choosing for equity bargains alternatively.
4.0 When a individual should put in Bond?
Chemical bond is a safe investing for people who are looking for steady and reliable beginning of income. Persons who has retired, aged or disabled will be benefited from bond as bonds will supply a regular involvement cheque to populate on. As for persons of in-between age and is on the journey towards retirement, they should exchange their assets from keeping equity as their portfolio investing to bonds due to cut downing hazard and go more careful towards their investing chance. Besides persons intent of puting in bond, a individual or investors peculiarly corporation should put in bond to pull off hazard for their portfolio. In another word is to use portfolio variegation. Companies can travel to bond investing as their agencies of bring forthing fund alternatively of publishing bond. Generating fund for long term intent can besides assist a company to bring forth stable assets from the involvement receive sporadically. Basically, puting in bond is for companies or persons who does non desire to retain monolithic and unpredictable hazard.
5.0 Related Issue
By Bernard Condon ( AP ) – Aug 22, 2010, New York
Bad economic intelligence sent investors out of stocks and into U.S. Treasurys this past hebdomad, widening a mass meeting that has defied some of Wall Street ‘s best heads, and, some say, logic. Treasury bonds maturating in 20 old ages or more have returned 2.1 per centum so far this twelvemonth. By contrast, stocks in the Dow Jones industrial norm have lost 2 per centum.
The inquiry now: Is it excessively tardily to leap into the great authorities bond bonanza?
To bulls, the mass meeting is still in its early phases. They say the weak economic system will do stocks to maintain falling and people to seek the safety of U.S. authorities debt. Reports this past hebdomad of out of the blue high unemployment claims and a fabricating lag in the middle Atlantic part helped bolster their instance.
But others say Treasury monetary values have risen excessively high, possibly even to bubble proportions. The thought goes that investors could dump Treasurys every bit rapidly as they bought them on even a puff of rising prices. Inflation is bad for bonds because it eats into principal.
Chemical bonds are by and large regarded as safer than stocks because you get your money back when they mature. But that ‘s merely true if you pay face value. If you buy when monetary values are higher, say $ 101 for a $ 100 bond, you ‘ll acquire $ 1 less than you put in. In buying power, you get back even less thanks to rising prices. But bonds, of class, besides pay involvement, and this can more than do up the difference.
The job is, bond bears argue, the involvement is n’t counterbalancing you much now. The output on 10-year Treasurys, which moves opposite its monetary value, stands at 2.61 per centum, a low non seen since early 2009 during the deepnesss of the recognition crisis. At that rate, it would take you 27 old ages to duplicate your money.
“ In the long tally we do n’t believe you ‘ll do a good return ” in authorities bonds, says Mark Phelps, CEO of money director W.P. Stewart & A ; Co. , mentioning the low outputs.
Phelps suggests that investors worried about a stalled recovery should lodge to stocks of large, conservative companies with small debt and fat dividends. Though you can still acquire hurt if their stocks autumn, at least the dividends will assist counterbalance.
An added entreaty: The dividends offered by such bluish french friess are higher than current 10-year Treasury outputs.
PepsiCo Inc. , for case, will pay you $ 3 yearly now for every $ 100 you invest – about 50 cents more than Washington pays for keeping your money for 10 old ages. What ‘s more, the stock is merchandising at 14.5 times estimated one-year net incomes. The average, or center, over the past 20 old ages is 23 times estimated net incomes, intending the stock is inexpensive, at least by this one step.
Phelps besides likes Procter & A ; Gamble Co. stock. It pays you even more than Pepsi – $ 3.20 a twelvemonth for every $ 100 invested. The shaper of Pampers nappies and Pringles french friess trades at 14.8 times estimated net incomes, a price reduction to its 19 median.
“ To set all in Treasurys, looks like a error to us, ” says Phelps, whose house manages $ 1.5 billion. But he adds, “ I would hold said that at the beginning of the twelvemonth, and I would hold been incorrect. ”
He ‘s got good company.
For old ages, famed investors and economic experts have been warning that the monetary value of Treasurys had risen excessively high. Bill Gross of elephantine bond house Pimco said that Treasurys had some “ bubble features ” in December 2008 when 10-year outputs neared 2 per centum. Nouriel Roubini, who gained near famous person position after naming the clang, warned of a bubble about the same clip. In a missive to his Berkshire Hathaway stockholders last twelvemonth, Warren Buffett compared the “ U.S. Treasury bond bubble of late 2008 ” to the Internet and lodging bubbles.
However, as frights of an economic prostration receded last twelvemonth, investors rushed into stocks and out of Treasurys, directing monetary values down and give up. Now, as outputs slip closer to their late 2008 depressions, bubble talk has returned.
On Wednesday The Wall Street Journal published a missive from Wharton professor Jeremy Siegel and Jeremy Schwartz, manager of research at Wisdom Tree Investments Inc. , that likened Treasurys to dot-com stocks of the late ’90s before they crashed. The headline: “ The Great American Bond Bubble. ” They noted that outputs on some bonds are the lowest in 55 old ages.
Their advice to investors will sound familiar: Buy blue french friess with fat dividends.
Avi Tiomkin, main investing officer of Tigris Financial Group and a Treasury bull for old ages, disagrees.
“ Dividends are great every bit long as a company can do money, ” he says. “ But if the economic system sinks, they ‘ll halt paying. ”
Tiomkin says he ‘s lodging with Washington IOUs. A twelvemonth ago he right predicted the 10-year output would fall from 3.75 per centum to around 2.50 per centum by mid-2010. Now he foresees deflation, or a consistent and widespread autumn in monetary values for goods and services similar to what afflicted Japan during the ’90s. And that will drive more people into Treasurys, raising monetary values and forcing 10-year outputs to below 2 per centum, perchance all the manner to 1 per centum, within a twelvemonth.
Van Hoisington, president of an eponymic investing house in Austin, Texas, who besides foresaw the Treasury mass meeting, is non purchasing all the bubble talk either. In his latest newssheet, he writes that “ The hazard, if non the chance, is that deflation lies in front. ”
He recommends buying Treasury bonds, as he has done for old ages now. He has returned 11 per centum over three old ages.
Jack Ablin, main investing officer at Harris Private Bank, prefers stocks. But even he ‘s worried.
Ablin notes that Federal Reserve involvement rate cuts intended to spur adoption and disbursement do n’t hold much of an impact if people are swimming in debt and ca n’t or wo n’t borrow. If monetary values of consumer goods autumn, he says, that will do affairs worse as people defer purchases in hopes they can purchase cheaper later.
“ There is small ( the Fed ) can make but stand on out of boundss with pom poms and cheer people on, ” he says.
Harmonizing to the article by Bernard Condon, New York, it specifies the pros and cons of bond investing as opposed to stock investing. Due to the bad economic systems, United States has reviewed its Treasury bonds and stock in the Dow Jones market. The article province that the Treasury bond provides greater return in this worsening economic systems as compared to the stock in the Dow Jones Industrial Average. However, U.S investors are feared towards bond bubble and hence escape towards stocks. This article collects the positions from several Wall Street heads on the misconception of the bond bubble and gives sentiment on the right measure to be taken either keeping stocks or Treasury bond. Some of the Wall Street mind provinces that keeping stocks are better as dividends provide by Blue Chip companies is greater than Treasury Bond. However, other sentiment provinces that the Treasury Bond is an appropriate measure to take due the more stable fluctuation of bond monetary value compared to stock monetary value. The article province even though the Blue Chip companies provide greater dividend, nevertheless during recession, they would non be able to supply such great dividend as they have less money to supply. The dividend from stocks depends on the economic system ‘s status. Favorable economic system status would give favorable return. Unfavorable economic status would take to less return. As for Treasury Bond, the involvement is fixed and the principal will be paid upon adulthood. Bond is said to be stronger during bear market as the return would be higher with the falling involvement rates. As stock market confronting headwinds, bond market would confront less fluctuation supplying stable return to investors.
From the article, I can state that the US market should non fly on stocks during recent economic downswing as it would merely lend to falling return towards the investors. Chemical bond market even though provides little return, but it is the most stable and safe securities to be held on during economic crisis. As recession came gyrating, companies cut back on paying their stockholders. Most companies are concentrating on beef uping the company during the recession. Investors who invested in bond would hold a unagitated period as bond would suit their loss from the stocks. Bondholders would still have periodic involvement and chief upon adulthood regardless of the economic status. As it was stated before in this paper, puting in bond is a great step of portfolio variegation to pull off hazard.