Unit 3

BBF 303/05

Banking and Financial

Systems in Malaysia

MALAYSIAN DEBT
MARKET

3.1 Debt
Securities
Classification of debt securities

Generally, debt securities are securities that provide

interest payments as compensation to investors for
the use of their funds in return-generating projects.
There are two major types of debt securities in the
Malaysian bond market:

Short-term debt securities with maturity of a year or

less and discount securities.

Long-term debt securities with maturity of more than

a year and coupon securities.

Debt securities

Short-term

Long-term

Discount debt securities

Coupon debt securities

-Cagamas Notes
-Malaysian Treasury Bills
-Government Investment
certificates
-Malaysian Islamic Treasury Bills

-Malaysian Government
Securities (MGS)
-Cagamas bonds
-Corporate bonds
-Khazanah bonds
-Government Investment
Issues
-Sukuk BNM Issues

What is Bond ?
A bond is a long-term debt instrument that pays the bondholder
a specified amount of periodic interest rate over a specified
period of time.
The bonds principal or par value is the amount borrowed by
the company and the amount owed to the bondholder on the
maturity date.
The bonds maturity date is the time at which a bond becomes
due and the principal must be repaid.

In return, the borrower pays the lenders an agreed coupon rate.

The bonds coupon rate is the specified interest rate that must
be periodically paid.

3.2 Characteristics of Bonds and

Other Fixed Income Securities in
Malaysia

Yield curve
A yield curve (Figure 3.3) graphically shows
the relationship between the time to
maturity and bond yields in a given risk
class. In general, the longer the bonds
maturity, the higher the interest rate (or
cost) to the firm.
There are three general types of yield curve:
Downward sloping
Upward sloping
Flat

Yield-to-Maturity (%)
Downward-sloping
10
Flat

Upward-sloping

4
Figure 3.3 Yield curve

10

15

Time-to-Maturity (years)

Yield Curve
Downward sloping: long-term borrowing costs are expected to be lower
than short-term borrowing costs. This curve reflects a general
expectation for an economic recovery from a crisis due to inflation
coming under government control and a stimulating impact on the
economy from the lower rates from fiscal and monetary policies.

Upward sloping: Short-term borrowing costs are expected to be lower

than long-term borrowing costs. This is the most common type of yield
curve, reflecting the prevailing expectation of higher future inflation
rates.

Flat: Borrowing costs are expected to be relatively similar for shortand long-term loans.

Call feature
A call feature, which is included in most
corporate issues, gives the issuer an
opportunity to repurchase the bond
prior to maturity at the call price.

This is a disadvantage to investors who

must give up a higher-yielding bond and
replace it with a lower-yielding bond in
order to continue having a position.

Key players in the

Malaysian bond
market
Government

- Financial and non-financial

institution/corporations
- Investors
- Intermediaries
- Rating agencies (RAM & MARC)
- Bond Pricing Agency Malaysia Sdn Bhd
(BPAM)

Government
The main issuers of public debt
securities
in
the
Malaysia's
local
currency bond market are the Bank
Negara Malaysia (BNM) and quasigovernment institutions, for instances,
Cagamas and Khazanah. These bonds
are issued based on conventional or
Islamic principles.

Investors
Normally, retail investors invest for their personal financial goals, for
instance, retirement, house, and properties. Institutional investors are paid to
manage other peoples money. They affect the investing environment through
their actions of buying and selling securities in large quantity in a market.
Both retail and institutional investors may invest in Malaysia's local currency
bond market. However, most of the investors in Malaysia's local currency
bond market are institutional investors whom have large sums of capital, for
instance, pension fund, financial institutions, insurance companies, and asset
management companies.
Employee Provident Fund (EPF) is the major shareholder for Malaysian
Government Securities (MGS) and banks, finance companies, and insurance
institutions are the major investors for Malaysian Treasury Bills. 30 per cent
of EPFs assets are required to be invested in MGS and this accounts for over
85 per cent of the total assets of the
Malaysian provident fund system. For the quasi-government bonds, Bank
Negara Malaysia (BNM) is the biggest shareholder of Cagamas bonds, which
are also held by commercial banks, finance companies, and merchant banks.

Intermediaries
Intermediaries are those who are involved in
the issuance, sale, and trade of debt
securities in the primary and secondary
markets, for example, fund managers,
brokers,

dealers, and investment advisers.

Licensed intermediaries involved in Ringgit

bond
market in Malaysia are CIMB Bank,
Hong Leong Islamic Bank, Affin Moneybrokers
Sdn Bhd, Bond Pricing Agency Malaysia and
so on.

Rating Agencies
Government and government-guaranteed debt securities are exempted
from being rated by rating agencies.
To have greater access to the Malaysian capital market, the Securities
Commission made an announcement on March 2009 that the mandatory
credit rating requirement is also exempted for convertible and
exchangeable bonds as well as sukuk issues.
In other words, Government, government-guaranteed debt securities,
convertible and exchangeable bonds as well as sukuk issues are exempted
from being rated while all private debt securities must be rated by the
recognised rating agencies.
Currently, there are two rating agencies recognised by the Securities
Commission (SC), namely, RAM Rating Services Berhad (RAM Rating)
and Malaysian Rating Corporation Berhad (MARC).
RAM was the first rating agency in the ASEAN region set up in 1990 and
MARC was launched in 1995.

Bond Pricing Agency Malaysia Sdn Bhd

(BPAM)
A BPAM is an independent entity initiated by the
securities Commission of Malaysia and legitimately
appointed to be Malaysias First Bond Agency on 18
April 2006.
Its primary role is to provide fair values or reference
prices on Malaysian Ringgit bonds based on the
observed trading activity.
Marked-to-Market** is normally the practice used in
valuing the bond investments.
**(Market-to-market : whenever there is an outstanding
contract or open position in trading account, the
investor will be marked according to daily closing
market price (settlement price)

3.3 Fixed Income Securities Market in

Malaysia
The bond market in Malaysia offers a wide range of
debt securities products including :
fixed coupon bearing bonds,
floating rates bonds,
asset-backed securities,
convertible bonds,
and callable bonds.
Malaysias Ringgit bond market is active for both
conventional and Islamic bonds.

Objective of bonds
The primary objectives of issuing government
securities are:
1. To provide investment opportunities to the
Employees Provident Fund (EPF), local banks and
insurance companies.
2. To finance the public sectors expenditure on
development.
3. To fund the Governments budget deficit and
prepayment of Governments external loans.
4. To allow Islamic banks to hold liquid papers that
meet their statutory liquidity requirements and
invest in securities that are issued based on
Shariah compliant concept.

Advantages
Elimination of default or bankruptcy risk
Minimization of call risk
Bonds are more liquid

Disadvantages
Lower rates of return
Exposure to inflation risk

Types of Government Debt

Securities
Malaysian Government Securities (MGS)
Malaysian Treasury Bills (MTB) sold at
discount
Bank Negara Monetary Notes (BNMN)
Government Investment Issues (GII) and
Malaysian Islamic Treasury Bills (MITB)
Sukuk BNM Issues (SBNMI)
Merdeka Saving Bonds

1. Malaysian Government Securities

(MGS)
MGS are long-term fixed-rate coupon bearing bonds issued by the
Malaysian government to raise funds from the domestic capital
market for developmental expenditure.
They are the most actively traded bonds. Par is repaid upon maturity
and coupon payments are made semi-annually.
Currently, BNM offers MGS and MGS callable. Both debt securities
are issued via competitive auction by Bank Negara Malaysia.
The successful bidders are determined by the lowest yields offered.
Original maturities of MGS are 3-year, 5-year, 10-year, 15-year and
20-year with standard transaction of RM5 million per lot.
However, there are callable MGS which gives the government an
alternative to redeem the bond before its maturity date.

2. Malaysian Treasury Bills (MTB)

MTB are short-term securities issued by the Government of
Malaysia to raise short-term funds for Government's
working capital.
The bills are sold at discount through competitive auction
and facilitated by Bank Negara Malaysia.
Original maturities of MTB are 3-month, 6-month, and 1year and redemption of par is made upon maturity. Similar
with MGS, these debt securities are also issued via
competitive auction and the successful bidders
determined by the most competitive yields offered.

are

The standard trading amount of MTB is RM5 million, and it

is actively traded in the secondary market.

3. Bank Negara Monetary Notes (BNMN)

BNMN are long-term debt securities issued either on a discounted or a
coupon-bearing basis depending on investors' demand, facilitated by
Bank Negara Malaysia.
These securities are to replace the existing Bank Negara Bills (BNB)
and BNM Negotiable Notes beginning December 2006 for the
purposes of managing liquidity in the conventional financial and
Islamic markets.
The maturity of BNMN is from 91-, 182-, 364-days and one to three
years. BNMNs are offered through competitive auction through
principal dealers.

4. Government Investment Issues (GII) and

Malaysian Islamic Treasury Bills
(MITB)
GII are long-term and MITB are short-term non-interest bearing
Government securities. Both GII and MITB are issued based on
Islamic principles by the Government of Malaysia funding
developmental expenditure.
Original maturities of GII are 3-year, 7-year, 5-year and 10-year.
Upon maturity, GIIholders may redeem the nominal value of the debt
securities. It is actively traded in the Islamic Interbank Money Market.
MITB with original maturities of 1-year are also sold on competitive
tender basis, based on the highest price tendered or lowest yield
offered.

5. Sukuk BNM Issues (SBNMI)

SBNMI are long-term zero coupon bonds with
maturities of one-to-two years. They are issued
based on an Islamic concept of al-Ijarah (sale and
lease back concept).
6. Merdeka Savings Bonds
These are tax-exempted bonds and targeted at
retirees by offering a slightly
higher return than the market rate. They are also
issued based on the Islamic
banking concept of bai' al-inah (sell-and-buy-back
arrangement).

6. Merdeka Savings Bonds

These are tax-exempted bonds and
targeted at retirees by offering a
slightly higher return than the market
rate.
They are also issued based on the
Islamic banking concept of bai' al-inah
(sell-and-buy-back arrangement).

Differences Between the major types of

conventional and Islamic Government
Securities

Refer to Unit 3, page 19-20

Types of quasi-government bonds

- Cagamas Berhad and Khazanah Berhad are the major
issuers of

quasi-government bonds.

There are 5 types of Cagamas issues as follow:

Cagamas fixed-rate bonds

Cagamas floating-rate bonds
Cagamas notes
Sanadat Mudharabah Cagamas
Sanadat Cagamas

- Khazanah Berhad is also the major issuer of quasigovernment

bonds:
Khazanah bonds are issued by Khazanah National Berhad
and
guaranteed by the Government. They are
issued based on the
Islamic principle of
murabahah.

Private Debt Securities (PDS)

PDS are debt instruments issued in the debt capital markets by private and public
corporations.
It comprises conventional or Islamic short and long-term debt securities. It could be
issued at a discount or at par to the nominal value with fixed or floating coupon rate.
These bonds can either be unsecured bonds which carry higher risk, bonds backed by
the cash flow stream of the issuers, bonds secured by fixed assets like properties,
securities, banks and corporate guarantees, convertible or non-convertible bonds.
All tradable PDS must be rated by Rating Agency Malaysia (RAM) or Malaysia Rating
Corporation (MARC) to ensure confidence and assist investors in making wise
investment decisions.
Commercial papers (CP) are short-term revolving promissory notes used to finance
short-term capital needs with maturities from 1 month to 1 year. Medium-term notes
(MTN) are medium-term revolving promissory conventional or Islamic notes have
tenors from 1 to 5 years. Corporate bonds with long-term maturity comprise of fixed or
floating-rate, step up, zero coupon, and warrants attached.

Asset Backed Securities

(ABS)
Asset Backed Securities (ABS) are securities backed by assets such as
mortgages, loans and receivables.
They are either issued by private or quasi-Government corporations.
ABS was first introduced by Malaysian corporations to the domestic market
issued in Malaysia in 2001.
They are issued on conventional and Islamic basis.

3.4 Statistical Fact of

the Malaysian Bond
Market
Development in primary market of the Malaysian

Development in primary market of the Malaysian

bond market
Table 3.4 shows the tenure composition of
primary market of Malaysian bond market. Most
of the outstanding bonds are long-term bonds
with maturity period of 10 15 years.

Table 3.4 Tenure composition of primary market of Malaysian bond market

Source: Bond Info Hub, 2010

3.5 Bond Ratings

Financial ratios and cash flow are normally used
to assess the likely payment of bond interest and
principle. The ratings affect prices for bonds.
High quality bonds with lower risk provide lower
returns to investors while low quality bonds with
higher risk provide higher returns.

Rating agencies in
Malaysia
Currently, there are two rating agencies recognized by the
Securities Commission (SC), RAM Rating Services Berhad
(RAM Rating) and Malaysian Rating Corporation Berhad
(MARC).
RAM was the first rating agency set up in 1990 to provide
credit-rating services for the Malaysian capital market.
MARC was incorporated in 1995 to undertake ratings of
corporates and corporate debt issues, including Islamic
capital market instruments, asset-backed securities, as
well as financial strength ratings of financial institutions
and insurance companies.

3.6 Bond Pricing

The behaviour of interest rates is the most
important factor in affecting bond prices.
Interest rates and bond prices move in opposite
directions. When interest rates rise, bond prices
fall and when interest rates drop, bond prices
move up.

Bond valuation
The bond price is calculate as the present value
of its coupons payments over a specific period
and the principle repayment payable at maturity.
The market interest rate is used to be the
discount rate for that issue.

3.7 Bond Trading

Buying and selling of bonds
- Investors may purchase bonds directly from the issuer in
primary or indirectly from dealers in the secondary market.
- When securities are first issued, they will be sold through the
primary market. The
primary market is the financial markets
used by corporations or government to raise new funds by receiving
the proceeds from the transaction.
- Secondary market is the financial market for trading of bonds that
have already been issued in the primary market.

Factors affecting bond

investments

1. Coupon rate

a. Coupon bond
i.

Fixed coupon rate

ii.

Float coupon rate

b. Zero coupon bond

Factors affecting bond

investments

2. Price

a. Par
A bond sells at par value when the required return of investors
equals the coupon rate and this normally applies to newly issue
bond.
b. Premium
A bond sells at a premium when the required return of investors is
less
than coupon rate or when the price of the bond is above its
face value.
c. Discount
A bond sells at a discount when the required return of investors
exceeds the coupon rate or when a bond price is below its par.

Factors affecting bond

investments

3. Maturity

The bond with longer maturity (20 years) is more

sensitive to interest rate changes than shorter (1 year).
The longer the maturity, the greater the price increase
will be. Maturity risk decreases as the bond gets closer
to maturity.
a. Short term
A bond with maturity of a year or less.
b. Long term
A bond with maturity of more than a year.

Factors affecting bond

investments

4. Redemption features
a. Call feature.

This feature allows the bond issuer to repay the investors

principle at a specified date before maturity. The callable
bond will sell for the higher yield. This is because
investors
should receive some compensation for the
risk that the bond
will be called away.
b. Put.
This feature provides investors an option to require the
issuer to repurchase the bonds at specified times prior to
maturity.

Factors affecting bond

investments

5. Credit quality

a. Government issues.
Sovereign risk is the probability that a country defaults
on its obligations to comply with the terms of loans.
Generally, all
government issues are free from
sovereign risk.
b. Private debt securities.
For Malaysia, private bonds are rated by RAM or/and
MARC. Bonds with higher credit quality (AAA) are
generally more
expensive than the lower credit
quality (D).

Factors affecting bond

investments

6. Yield

Yield is the return on investment. Generally, the

higher the business and financial risks of the
issuer, the higher the bond yield.

Thank you

Prepared by KL Tan