Bonds & Guarantees in Malaysia

In simple words, Bond is a transaction whereby Investors or Lenders invest or lend their funds to Issuer or Borrower, where the funds will be used to finance Projects or Developments. Based on Income generated from the Projects or Development, the Issuer or Borrower will pay the principal plus periodic interest to Investors or Lenders.

According to About.com, a bond is a fixed interest financial asset issued by governments, companies, banks, public utilities and other large entities. Bonds pay the bearer a fixed amount at a specified end date. A discount bond pays the bearer only at the ending date, while coupon bond pays the bearer a fixed amount over a specified interval (month, year, etc.) as well as paying a fixed amount at the end date.

Bonds are also known as guarantees where they act as a common feature of many capital and construction projects, and nowadays, they are famous as contracts for the supply of goods. In other word, a guarantee is an undertaking by a guarantor (normally, banks or insurance companies) to pay a sum of money to the investor in the event of default by the issuer. By issuing a bond, the investor is assured that the issuer is dedicated to the project or transaction and there are financial funds to deal with troubles that may occur.

Below are some of commonly used bond types:

• Bid or tender bonds which are used when issuers are put out to tender
• Performance bonds which may be called if issuer fails to carry out the contract agreeably or supply goods as precisely.
• Advance payment and staged payment bonds which allows the investors to reclaim money paid to the issuer
• Retention bonds & warranty bonds which are used to ensure that issuers fulfill their obligations following completion of the contract.

Investing requires strategies, and same goes to bonds. Practically, there are 3 strategies that may be used on bonds, and are stated as below:

• Barbell or 2 extreme maturities – an approach in which a portfolio is considered to have securities with maturities that are highly concentrated at one point on the yield curve. For an example, invest both long term and shot term when rates directions are not clear
• Target or concentrated durations – an approach in which a portfolio is designed to have securities with maturities that are highly concentrated at one point on the yield curve. Clear examples are investing in short term when interest rates are expected to rise and investing in long term when interest rates are expected to fall.
• Ladder or uniform distribution – an approach in which a bond portfolio is constructed to have approximately equal amounts invested in each maturity within a given range to reduce interest rate risk. An example is investing in all maturity; short, medium and long term when rates directions are not clear.

On top of that, there are few factors that are considered before deciding in investing in bonds. Some of them are:

• Fixed Coupon – typically payable semiannually, but some are quarterly and monthly.
• Float Coupon – reset periodically to a specified prevailing market rate
• Zero Coupon – payable at maturity
• Face value Price – newly issue bond
• Premium Price – when the price of the bond is above its face value
• Discount Price – when a bond price is below its value
• Yield – the return on investment
• Short Term Maturity – Less than 1 year
• Long Term Maturity – more than 1 year
• Call Redemption – provision that allow the issuer to repay the investor’s principal at a specified date before maturity
• Put Redemption – provisions that allow the investor the option of requiring the issuer to repurchase the bonds at specified times prior to maturity
• Government issues (Credit Quality) – sovereign risk
• Private Debt Securities (Credit Quality) – higher credit quality are generally more expensive.

Malaysia emphasis on the need for regulatory safety nets designed to protect investors from unethical and unscrupulous practices. Any abuses in the securities industry can be reported direct to Securities Commission through it complaint unit as below:

• Complaints Unit
• Securities Commission
• No. 3, Persiaran Bukit Kiara,
• Bukit Kiara,
• 50490 Kuala Lumpur
• Tel: 603-6204 8999
• Fax: 603-6204 8991
• Email: aduan@seccom.com.my

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