CHAPTER 5
N
The Malaysian Bond Market
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Learning Objectives
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Describe the Malaysian bond market.
Describe the different types of bond issuers in the
Malaysian bond market.
Describe the different types of bond investors in the
Malaysian bond market.
Describe the different forms of debt securities.
Explain the role of the Malaysian bond pricing
agencies.
Explain how bonds are rated.
Explain the role of global bond agencies.
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THE MALAYSIAN BOND MARKET
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The Malaysian Government started to issue
bonds in the 1970s, mainly to raise funds for
the country’s development projects.
When the country grew, the dominance of
the government as bond issuer shifted to the
private sector.
Instead of relying on banks and equity
markets
to
source
finance,
private
companies used the bond market as an
alternative source of capital.
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The Needs for Strong Bond Market
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Malaysia needs a strong domestic bond
market for the following reasons:
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Investors demand large amount of finance for
their manufacturing activities, infrastructure
improvements and provision of services.
The change in the economic structure from
labour intensive to capital intensive industries
demands long-term debt financing that cannot
be met by the banking sector or equity market.
Long-term institutional investors needs funds for
portfolio diversification and asset liability
management purposes.
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WHO ARE THE ISSUERS?
1. Government of Malaysia
 Government issues marketable bonds to finance
development expenditure.
 For development expenditure, the government
issues interest-bearing long-term bonds in the
domestic capital market.
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WHO ARE THE ISSUERS?
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Government of Malaysia
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Bonds raised in the capital market bear fixed rate
semi-annual coupon payments with repayment of
principal upon maturity.
Also issues long-term and short-term non-interest –
bearing securities based on Islamic principles.
These securities are known as Government
Investment Issues (GII) and Malaysian Islamic
Treasury Bill (MITB)
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WHO ARE THE ISSUERS?
2. Bank Negara Malaysia
• Roles and responsibilities of BNM includes:
• the economic management, institution building and
expansion of financial system.
• Acts as the banker and adviser to the government (role
includes managing the liabilities of the government both
in Malaysia and abroad, advises on loan programmes
such as planning the government securities auction
calendar, timing of loan and issuing of new types of
securities)
The central bank issues bonds to manage liquidity in both
the conventional and Islamic financial markets.
Bank Negara provides temporary advances to the
government to cover any deficit in the budget revenue.
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WHO ARE THE ISSUERS?
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2. Bank Negara Malaysia
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Examples of securities issued by Bank Negara are:
 Bank Negara Monetary Notes
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Discounted or coupon bearing government securities
with maturity periods of 91, 182 and 364days and one to
three years.
Issued to manage liquidity in both conventional and
Islamic markets.
Offered through competitive auction among principal
dealers.
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WHO ARE THE ISSUERS?
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Bank Negara Malaysia
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Sukuk BNM Issues
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Zero coupon bonds with maturities of one to two years.
Based on Ijarah (sale-and-lease back concept)
Merdeka Savings Bonds
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Savings vehicle targeted at retirees by offering a slightly
higher return than the market rate and tax exempted.
Based on Islamic banking concept of Bai’Al-Inah ((saleand-lease back arrangement)
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WHO ARE THE ISSUERS?
3. Quasi-government Institutions
Khazanah Nasional Berhad - It is the investment holding arm
of the Government of Malaysia.
Khazanah’s main long-term objective is to promote economic
growth and make strategic investments on behalf of the
government which would contribute towards nation building.
Pengurusan Danaharta Nasional Berhad - Public company
wholly owned by the Malaysian government.
Act as the national asset management company.
Re-energize the Malaysian financial sector by buying nonperforming loans (NPLs) from financial institutions and
maximize their recovery value.
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WHO ARE THE ISSUERS?
3. Quasi-government Institutions
Danamodal
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Special purpose company incorporated by Bank
Negara Malaysia
Recapitalize and strengthen Malaysia’s banking
institutions
Promote stability in the local banking industry
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WHO ARE THE ISSUERS?
Cagamas Berhad
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The National Mortgage Corporation
Leading securitization house
Promote development of the private debt securities market
Promotes secondary mortgage market in Malaysia
Issues debt securities to finance the purchase of
government servants’ housing loans
Cagamas issues are:
 Cagamas Fixed Rate Bonds
 Cagamas Floating Rate Bonds
 Cagamas Notes
 Sanadat Mudharabah Cagamas (housing loan,
finance/lease)
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4. Multilateral Development Banks
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The World Bank Group
MDBs grant financing for technical assistance, advisory
services or project preparation
Provide financial support and professional advice to the
developing countries in terms of economic and social
development activities. Interest rate is fixed over their stated
maturity.
MDBs borrow development funds from international capital
markets and re-lend to the governments of developing
countries in the form of long-term loans.
The MDBs use money donated by governments of other
countries to finance very long-term loans. The borrowing
countries pay interest well below market interest rates.
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BOND INVESTORS
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Employees Provident Fund
Pension Funds
Unit Trusts
Insurance Companies
Asset Management Companies
Discount Houses
Commercial Banks
Islamic Banks
Investment Banks
Securities Companies
Finance Companies
Merchant Banks
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DEBT SECURITIES PRODUCTS
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Fixed rate bond.
Hybrid bonds.
Floating rate notes.
Variable rate notes.
Medium-term note programmes.
Commercial mortgage-backed securities.
Asset-backed securities.
Securitized products.
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Types of Government Securities
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M’sian TB – short-term govt. securities
M’sian Islamic TB – short-term govt secs.
M’sian Govt. Secs – for long-term project
financing
Govt. Investment Issues (GII) – Long-term
Islamic financing
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Corporate Bonds
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Straight Bonds – often called “plain vanillas”, with fixed
coupon rate and maturity period at the time of issue. Tend to
carry high interest rate.
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Bonds with detachable warrants – options to purchase a
number of shares at pre-set exercise price, within a specified
time.
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Floaters – floating coupon rate.
Zero-coupon bonds – sold at a discount and redeem at par
on maturity.
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Asset-backed securities – backed by assets such as
mortgages, loans, receivables, etc. E.g. mortgage bond requires
the issuer to pledge certain real asset as security for the bonds.
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Convertible bonds – rights to convert the bonds into a
specified number of issuers’ stocks, within a specified time and
specified price.
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Islamic Bonds
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Debt-based bonds – for sale and purchase
of assets based on deferred payment.
Asset-based bonds – for income–generating
assets (leasing).
Equity-based bonds – joint venture business
(represent common ownership and entitle
the holders shares in a specific assets).
BNM – Sukuk Ijarah (sale and lease-back
concept).
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Islamic Bonds
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Merdeka-Saving Bonds – for retirees (age
56 and above)
M’sian Islamic TB
BN Monetary Notes
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Bond Rating Agencies
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Investors and financial professionals look to one rating
agency that is authoritative, objective and credible to
assess if issuers will default in paying back their principal or
deliver the promised periodic coupon payments.
Investors are likely to seek the expertise of rating agencies
that will analyze and provide rating scale on bonds issued
by different issuers.
They are independent from bond issuing companies.
Focus on credit analysis of issuing companies to assess on
the chance that a bond holder will not receive the
scheduled interest payments or principal at maturity.
Default risk is assessed according to the creditworthiness of
bond issuers over the life of a bond.
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Bond Rating Agencies
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Local
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RAM (Rating Agency Malaysia Berhad)
established in 1990
MARC (M’sian Rating Corporation Berhad)
established in 1996.
International (Global independent rating
agencies)
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Standard and Poor’s
Moody’s
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