Issue No.


Back to index

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
Tel : 03 - 469 5560 Fax : 03 - 294 5561

This article is copyright and no part of it may be reproduced in any form without the prior consent of Normandy Advisory Services

Bonds make up a substantial portion of the global investment platter. In established financial markets like the U.S., thousands of different bonds are available.

The U.S. government issues bonds and notes through the Treasury Department and various federal agencies. Billions of dollars worth of new bonds are issued each year at auctions to accommodate the ever-growing demand of foreign players both intemational and domestic. There are many bond players around the world who trade daily in the U.S. bond markets.

To many investors, bonds seem to be a relatively simple instrument. It is a rather simple relationship between a debtor and a creditor. The issuer who is also the debtor returns the principal value when the particular bond matures. Prior to maturity date, the bondholder will receive fixed-income returns in the form of interest rate payments.

Bonds issued by the government are normally guaranteed or risk-free. Bonds may have different features. They may be converted to shares (convertible bonds) or have detachable warrants.

What is a bond fund? It is basically similar to a unit trust fund but its investment menu comprises basically of bonds and not shares. It is a managed fund with invest ments on fixed-income securities listed on the KLSE, corporate bonds traded in the money market, Malaysian Government Securities, treasury bills, foreign fixed income securities/bonds, Malaysian currency deposits, Cagamas bonds or bankers' acceptances.

Currently there are four bond funds available in the local market. Table 1 depicts the performances for all funds in 1996. Analysis include only those funds that have operated for one full year. From the table, bond funds have generally delivered higher retums than fixed deposits in 1996 amid the high interest rate environment.

Why bonds after all? Investors who are looking for greater security in the form of predictable income should seriously consider investing in this type of investment. Bonds very often could offer returns better than some stocks. In addition, reliable and regular income offer you greater peace of mind.

In periods of falling interest rates, bonds can produce handsome gains. This is because prices of bonds rise when interest rates fall. There is potential for capital appreciation in addition to fixed interest payments.

One might dispute that bond investments could be not so rewarding when interest rates rise. Yes, it is true that bond prices would drop when there is interest rate appreciation. However, you will be compensated with higher yields, and if you do not turn around and sell them, you will be assured of the principal of the upon maturity (assuming the issuer does not default).

For the purpose of protecting investors in Malaysia, bonds are rated by Rating Agency of Malaysia (RAM) and Malaysian Rating Corporation Berhad (MRCB). The independent rating helps potential investors to determine the quality of bonds and safety of timely repayment of principal and interest.

For illustration, MRCB's Long Term Debt Ratings apply debt issues with maturities of more than one year. Unlike bonds, stocks prices are not guaranteed regardless of the holding period.

In fact most investors purchase bonds for its fixed income characteristic rather than for capital appreciation. Nevertheless, increased volatility in interest rates in the overseas markets have been swinging bonds prices as aggressively as stocks. This is perhaps something that speculative Malaysian investors are looking for.

Turbulent interest rate environment should not bother you that much if you are long-term oriented and plan to set aside a portion of your investments for your retirement for instance.

The more important aspect of bond investment is diversification for your investment portfolio. Compared to stocks, bonds are a good source for diversification since they generally imply lower risks. The fixed-income characteristics should also improve the liquidity of your investment portfolio.