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CHAPTER 4: CAPITAL MARKET (BOND MARKET Government and Corporate Bond…
CHAPTER 4: CAPITAL MARKET
BOND MARKET
Government and Corporate Bond
What is bond?
:pen: Bond is an instrument that indicates that the issuer promises to pay periodic interest to the investor and repay the principal amt borrowed at maturity.
Advantages of bond
:check: Fixed periodic return received by investors
:check: Prices more stable
:check: Risk is relatively lower
Disadvantages
:green_cross: Declining in creditworthiness of issuer
:green_cross: Holder of bond may exposed callable risk
Features of bond
par value: 1000
no voting rights
maturity period: 6-12mnths
Type of government bond market
MITB
BNMN-i
GII
BNB
MTBs
Cagamas Instrument
MGS
MTNs
CPs
Bond rating
is an evaluation on the credit quality of the issuance of the debt instrument
Objectives
:pen: It provides a complete, accurate and reliable information of the issuer of the bond
:pen: It create awareness on the creditworthiness among the bond investors
:pen: It is a cost effecyive marketing tools and an effective movement of surplus fund in a financial system
:pen: It provides an easily understood scale for the investors to assess a bond issue
RAM's rating scale and definition
AAA
: Best quality bond. Highest safety in timely payment of interest and principal
AA
: High safety in timely payment of interest and principal
A
: Adequate safety in timely payment of interest and principal. Sensitive to changes in economic condition
BBB
: Moderate safety in timely payment of interest and principal. Lacking in certain protective elements
BB
: Inadequate safety in timely payment of interest and principal. Future condition not well-assured
BB
: High risk on interest and principal payments.
C
: Substantial risk of default.
D
: Payment of interest and principal in arrears. Already default.
EQUITY MARKET
Common Stock & Preferred Stocks
What is equity market?
:pen: Equity market helps companies to raise funds for the first time by issuing of common stocks (IPO) and also provide the platform of its trading in the secondary markets.
Types of market
Primary market
:pen: It is a place where a company will for the first time issues stocks or bonds to the public to raise funds.
IPO is the choices of firm has to market its securities.
Reason for public listing:-
:star: To raise funds for business expansion
:star: To settle exixsting debts
:star: To enhanced credibility and reputation
:star: To be able to set a more professionally managed corp
:star: To obtain easier funds for future expansion
Secondary market
:pen: It is a market in which securities traded are not issued by the issuer but by another investor.
Bursa Malaysia Berhad aiming to offer an internationally competitive marketplace for fund raising and investment.
:star: To regulate and maintain facilities for conducting the business of a stock exchange in Malaysia
:star: To continually promote and develop capital market and protect interest and welfare of members
:star: To provide and enact listing requirements and enforcement of rules on listed companies
Function of SC IN EQUITY MARKET
Promotes and encourage proper conduct of members
Regulate takeover and merger matters
Advise Minister of Finance matters relating to securities and futures contract industries
Approving corporate bond issues
Risk of investing in stock Market
Purchasing power Risk
Liquidity Risk
Financial Risk
Interest rate Risk
Business Risk
Market Risk
COMMON STOCK
Defined as instrument that represents ownership in a company that issues the stock.
ADVANTAGES
:check: High return
:check: Voting and preemptive rights
:check: Easy to trade and low transaction cost
:check: Variety of choices
:check: High Liquidity
DISADVANTAGES
:green_cross: Fluctuations of the prices
:green_cross: Lower current income
:green_cross: Difficulty in determining the intrinsic value
TYPES
:pencil2: Blue-chips stocks
:pencil2: Growth stocks
:pencil2: Income stocks
:pencil2: Cyclical stocks
:pencil2: Defensive stocks
:pencil2: Speculative stocks
Factors affecting stock prices
:smiley: Economic factors
:smiley: Industry Outlook
:smiley: Corporate earnings
:smiley: International stock market condition
:smiley: Crowd psychology
:smiley: Political scenario
