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BOND FUTURES - Coggle Diagram
BOND FUTURES
What is Bond?
Bond is a legal agreement between an issuing institution (issuer) and investors (bondholders), obligating the issuer to pay interest regularly and repay principal at the end of maturity to the bondholders.
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investors who have surplus cash are expected to lend their money for interest revenue while the investors who have deficit cash are expected to borrow and pay interest expense.
bondholders are prospective lenders searching for alternative investments in terms of fixed periodic interest payments and repayment of principal at the date of maturity from their investment.
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Features of Bond
Coupon Payment
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receive a fixed amount of interest payment from an issuer throughout the life of the bond contract that is until maturity.
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Par Value
Malaysian government securities (mgs) is rm 100,000 per bond
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Every bond must have a par price (value), which represents the. face value or principal price of the bond at the time of its issuance
Maturity Date
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bondholders have the right to claim interest income from the issuer, while the issuer has an obligation to pay interest until maturity.
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Hedging with MGS Futures
A long (buy) hedge is undertaken by the intending lender who are worried interest rates will fall at the time when mgs is actually bought, and hence, receives less interest revenue.
a short (sell) hedge is used against increasing interest rate. MGS futures may be effectively used for hedging against volatility of long-term interest rates.
As opposed to the KLIBOR futures which is used for hedging against short-term interest rates fluctuations, hedging with MGS futures is established in anticipation of changing long-term interest rates between today and later.
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Types of Bonds
treasury bond in which treasury will issue bonds on behalf of the federal government to raise funds for public infrastructure projects, such as roads, schools and hospitals
Corporate
corporate bond refers bond issued by private corporations in search for funds. Firm will issue bonds to raise capital for undertaking new projects or settle debt with banks.
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SPREADING
Bear Spread- Market bearish- Short Near Term Futures, Long Further Term Futures
Bull Spread- Market bullish- Long Near Term Futures,
Short Further Term Futures
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