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CH4 BOND (Characteristic of bonds (Par/ Face value - The amount of money…
CH4 BOND
Characteristic of bonds
- Par/ Face value - The amount of money that is paid to the bondholders at maturity
- Bond indenture - A legal agreement between the firm issuing the bonds and the bonds trustee who represents the bondholders.
- Coupon rate - The rate that is fixed, determine the periodic coupon interest payments and also represents the interest cost of the bond issue to the issuer.
- Coupon payment - Represents the periodic interest payments from the bond issuer to the bondholder.
- Current yield - Refers the ratio of annual interest payment to the bond's market price
- Market value - The market price of the bond is equal to the present value of the interest & interest payment
- Maturity Date - Represents the date on which bond matures
- Call date - Represents the date at which the bond can be called prior to maturity.
- Call price - The amount of money the issuer has to pay in order to call a callable bond.
- Call premium - The amount of call price exceeds the par value of the bond
- Required rate of return - The rates of return that investors currently require on a bond
- Risk of default- The inability of bond issuer to fulfill the financial obligation to bondholders such as payment of interest.
- Sinking Funds - A fund into which a company sets a side money over time , in order to retire its preffered stock
- Yield to maturity - The reate of return that an investor would earn if he bought the bond at its current market price & held it until maturity
- Yield to call - The rate of return that an investor would earn if he bought a callable bond at its current market price and held it until the call date given that the bond was called on the call date.
Type of bond
Government bond
Malaysian Government Securities -Long term bond issued by the government to raise funds from the local financial market
Government Investment issues - Non interest bearing government securities based on islamic principles issued by the government & placed on a competitive tender with maturities of 3-10 years.
Malaysian Treasury Bills (MTB) - A short term securities issued by BNM on behalf of the government. Treasury bills are used for working capital
Malaysian Islamic Treasury Bills (MTB) - Short term securities issued by the Government of Malaysia based on Islamic principles.
Corporate Bonds
Straight Bond - Simple bond with fixed coupon rate, maturity date at the time of issue & carry high coupon rate either semi annually/annually
Convertible bond - This bond gives a right to convert the bonds to a number of the issuer's stock during a period. The coupon rate is lower
Bond with warrants - The issuers offers the entire issue of bond with warrants at face value to a primary subscriber then they can detaches the warrant and sells them to shareholders of the issuer in the secondary market.
Floating rate Bond - The coupon rate of floating rate bond is pegged to an agreed benchmark such as KLIBOR and their reference rises & falls, the coupon rate will change also
Zero coupon bond - This bond no periodic coupon are paid during the life of the bond. Normally this bond sold at discount which the price lower than its face/ par value so that the investors earns from diff between discount price & face value when the bond matures.
Mortgage Bond - This require the issuers to pledge certain real assets as security for the bank and also for the default situation.
Islamic Bond (Sukuk) - The islamic bond that raising finance in the international capital market through Shariah Compliant based.
Secure bond - The debt payments of secured bond are secured by a pledged of the issuer's assets, typically shares, a building / land.
Unsecured bond - Not backed up by any collateral, higher risk and higher coupon rate than secure bonds
Guaranteed Bond - This guaranteed for full debt repayment by a guarantor which could be the parent company/ or one / more financial institutions . The safety of the bond depends on the financial capability of the issuer and the guarantor to satisfy the term of guarantee.
Issuing Bond
Advantages
- Issuing bond does not affect the shareholding so that it does not bring problem of controlling power & decision making
- Interest cost can be deduct against the taxable profit
- Bond rates are lower than dividend rates & finance
- Market interest rate low & bond is best alternative for raising long term funds
- The issuer's obligation to bondholders is limited to fixed interest payments throughout the contract bond even though the issuer's profit is high
Disadvantages
- The company has to pay the interest & fall in profits if the organization need to pay finance cost high
- Interest payment are mandatory whther firm make profit / not
- When the debt level raising up, the company risk will increase and make the investors unhappy
- When the debt of the company level increase the cost of capital, the investors may have low return
- Give negative picture on company performance if too many debt.
Investing in Bond
Advantages
- Provides a predictable stream of income & repayment of principal
- Bond can be traded even before maturity among other investors & do not have to wait the maturity to get money back
- Considered to be secured creditors & they will be paid before shareholders
- Bond bear lesser risk than equity capital as bond holders are guaranteed of the repayment capital
- Tax free give the opportunity to earn income & reduce income tax payments.
Disadvantages
- Bonds rates are lower than dividend rates
- Do not get chance to participate in daily decision making process
- Bondholders do not receive additional benefits as shareholders receive such as participation agm, receive copy annual report
- Do not have right for remaining assets after the liquidation.
- Long terms bonds are tend to be volatile and can sometimes fail to keep up with inflation.