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Chapter 7 :pen:, BONDS, Features of Bond - Coggle Diagram
Chapter 7 :pen:
Principle Dealership
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= status conferred on selected commercial banks, merchant banks and discount houses that have to annually satisfy certain criteria to qualify for the status.
Principal dealers are required to
- tender for/underwrite all primary issues of gov and gov-related securities,
- to act as agents to BNM in its open market operations.
In facilitating MGS transactions,
Market makers obligated to quote prices of bonds that they are willing to
- buy from investors (bid prices)
- sell to investors (offer prices).
Two-way quotations creates market liquidity for the trading of the bonds by providing investors accessibility in and out of the market.
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BONDS
A legal agreement between an issuer and bondholders, obligating the issuer to pay interest regularly and repay principal at the end of maturity to the bondholders.
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Types of Bond
Government bond
Treasury bond in which treasury will issue bonds on behalf of the federal government
To raise funds for public infrastructure projects
eg: roads, schools and hospitals.
Corporate bond
Bonds issued by private corporations in search for funds.
To raise capital for undertaking new projects or settle debt with banks.
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MATURITY PERIOD
Throughout bond period,
Bondholders entitled to claim interest income from issuer,
Issuer obligated to pay interest until maturity.
When the contract ends = the date of maturity.
For bond, maturity = the period or the number of years before bond expires.
CALL PROVISION
Thus, to take advantage of falling interest rates (using CP), an issuer can
- redeem the bond with higher interest rates
- issues new bond at a lower interest rate,
hence, save interest expenses on bond.
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aka redemption :
issuer will retire the bond earlier with call price
= principal price + annual interest payment
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PAR VALUE
Investor POV; an initial investment expected to receive back @ end of maturity from issuer
(has the obligation to make principal repayment as stated in the indenture)
USA - principal price = $1,000 /bond MGS - principal price = RM 100,000 / bond.
Every bond must have a par price (value),
PV = face value / principal price of bond at the time of its issuance.
COUPON PAYMENT
Thus, bondholder receive fixed amount of interest payment from an issuer throughout the bond contract until maturity.
Paid once/twice a year. (except zero-coupon bonds)
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Bondholders receive coupon
- Entitled to receive interest payment periodically.
- Each bond states the rate of interest (or coupon) at the time of issue.
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