Issue No.5


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Investors have a multitude of options when investing their money in order to maximise their return or income. This is particularly the case with fixed interest investments - debentures, bonds, fixed deposits, and other types of bank accounts. The rising popularity of bonds as a form of fixed interest investment has created significant interest and participation by private investors, Malaysian institutions and fund managers. Fixed income investments for the private investor are an alternative to fixed deposits and generally pay a higher rate of interest.

Fixed-income investments such as bonds provide precisely that: a fixed rate of income over a specific period of time. Simple? In theory, yes. In reality, though, there are hidden complexities to some fixed-income securities which can baffle and deter the individual investor.

What are bonds? It is a form of loan to the issuer, the party borrowing funds. Bonds are issued by the government and corporations to raise funds. The origin of bonds was in the United States when at the turn of the century privately owned railroad companies were raising large amounts of capital by issuing bonds to the public with long dated maturities.

The highly volatile interest rate environment in the U.S. post-1970 gave rise to active bond portfolio management. Defaults in the corporate and municipal sectors led to increased emphasis on creditworthiness. With the size of bond issues growing dramatically, portfolio managers became much more active and the secondary market trading developed rapidly.

The development of the Malaysian bond market appears to be following a similar pattern although it is still at its infancy stage. The lack of liquidity (ease of buying/selling) at the present time is often been cited as the main obstacle to developing a healthy and active bond market. But you have to crawl before you can walk.

Bonds and all interest-bearing securities have four basic features:

  • A yield to maturity - it is the discount rate that equates the present value of all the bond's expected future cashflows with the current market price of the bond. It is frequently used to gauge the bond's expected average annual rate of return at anytime until maturity.
  • A coupon - a semi-annual or annual fixed rate of interest to the buyer/investor.
  • A principal amount or face value - it is the amount paid to the investor upon maturity of the bond.
  • A maturity date - it is the date when the principal amount is paid to the investor.