You are on page 1of 35

Bond Basics

Presented by
Thi Thi Lwin
February, 2011

Financial Markets
Long-Term

Financial Market (or)


Capital Market (or) Securities Market
Short-Term Financial Market (or)
Money Market
Derivatives Market/Futures and Option
Market
Foreign Exchange Market

What are Securities?

An Ownership Position in a Company (a stock


or share)

A Creditor Relationship with a Company or


Governmental Body (a bond or debenture or
debt instrument)

Rights of Ownership (an option, subscription


right, warrant)

Short-Term Securities:
Less than one year
Short-term
vs. Long-term
maturity (T-bill, F-bill, CD, CPetc.)
securities

Long-Term Securities: More than one year


maturity (T-bonds, Stocks and Shares)

Securities Markets

Stock and Share Market


Primary or Issuing Market
Secondary Market or Trading Market {Exchange
Market (Stock Exchange) and Over-The-Counter
(OTC) Market}

Bond Market
Primary or Issuing Market
Secondary or Trading Market
{Exchange Market (Stock Exchange) and Over-TheCounter (OTC) Market}

Basics of a Bond

A Kind of Debt Securities

Represents a IOU (or) Promissory Notes of


the borrowers

A bond certificate is a record of the loan and


the terms of repayment. (Identifying Number,
the Issuer name, a symbol or logo, official
seal, signature of authorized officers.)

Continued..

Principal/ Nominal Value/ Face Value /Par


Value/Redemption value: the amount that will
be repaid at maturity.

Coupon / Interest Rate: interests are usually


paid semi-annually.

Maturity Date: the date the bond comes due


and must be repaid.

Legal Framework and


Regulatory Body
The Government Securities Law
The Securities & Exchange Law
Companies Law
Other Related Laws, Rules and Regulations
Regulatory Body (Ministry of Finance, Central
Bank, Securities and Exchange Commission
(SEC))
Central Bank acts as Fiscal Agent of the
Government.

Who are Bond Issuers?


Bond Issuers are Money Borrowers.

Governments, Local Authorities, Municipalities


Governmental Agencies

Companies / Corporations

Supranational Organizations (ADB, IMF,IBRD)

The issuer has obligation to repay the principal on


specified date and interests.

Who are Bond Investors?


Bond Investors are Money Lenders.

Individual Investors

Institutional Investors: Bond Funds, Pension Funds,


Provident Funds, Banks, Securities Companies,
Insurance Companies, Other Financial Institutions.

Corporate Investors (Companies/Corporations)

Types of Bond

Public Bonds vs. Private Bonds (or)


Government Bonds vs. Corporate Bonds
{Treasury Bond/Sovereign Bond (Construction Bond,
Deficit Bond, Refunding Bond) Local Government
Bond/Municipal Bond, Government Agency Bond/
Quasi-Government Bond}
Short-Term Bonds (usually a year or less, called Bills)
Medium-Term Bonds (two to ten-year)
Long-Term Bonds (ten to thirty- year)
Super Long-Term Bonds (thirty-year or more)
Coupon / Interest Bearing Bond vs. Zero Coupon Bond
(Deep Discount Bond / STRIPS)

Continued

Fixed Interest Rate Bond (Straight Bond) vs. Flexible Interest


Rate Bond (Index-Linked Interest Bearing Bond, Inflation-Linked
Bond)
Bearer Bond (holder of bond certificate is owner) vs. Book-Entry
Bond (registered & stored electronically)
Secured Bond vs. Unsecured Bond
Callable Bond, Uncallable Bond, Puttable Bond, Perpetual Bond
Local Currency Denominated Bond vs. Foreign Currency
Denominated Bond
Investment Grade Bond (AAA ~ BBB) vs. Junk Bond
Hybrid Bond: Convertible Bond, Bond with Warrants
Yankee Bond, Surmurai Bond, Dragon Bond, Eurobond
(Eurocurrency Bond), Canto Bond, Global Bond etc.

Bond Markets
Bond Issuing Market (or) Primary Market

Auction Method (through Primary Dealers, Interest


Basis vs. Discount Basis )
Underwriting Syndicate Method (Banks, Securities
Companies, other Financial Institutions)

Bond Trading Market

Exchange Market (Stock Exchange)


Over-The-Counter Market (Dealer Basis vs. Broker Basis)
Repurchase Agreement (Repo Market)
Bond Lending Market (Borrowing and Lending Market)

Risks Associated with Bond

Credit Risk
Interest Rate Risk
Purchasing Power Risk
Marketability Risk
Liquidity Risk
Legislative Risk
Call Risk
Reinvestment Risk

What is Credit Risk

Rating services measure the credit risks for the


investors.
The best known services in the U.S. (Standard and
Poors Corp., Moodys investors service Inc. and Fitch)
S&Ps Ratings: AAA,AA,A,BBB,BB,B,CCC,CC,C,D
Moodys Ratings: Aaa,Aa,A,Baa,Ba,B,Caa,Ca,C,D
The higher the bonds rating, the lower its interest
rate will tend to be. S&P uses + or - to indicate
strength or weakness, Moodys uses 1,2,3 with 1
being the highest.

Some Concepts for Bond


Trading

Ex-date vs. Cum-date (Ex-coupon/interest vs. Cumcoupon/interest)


Accrued Interest
Clean Price vs. Dirty Price (including accrued interest)
Bond Yields
Nominal Yield : coupon rate
Current Yield : the percentage of annual interest in
value divided by the bonds market price.
Yield to Maturity (YTM)

Singapore Government
Securities (SGS) Markets
Laws and Regulations

Government Securities Act


Government Securities Regulation
Local Treasury Bills Act
PSA/ISMA Global Master Repurchase Agreement
(GMRA)

Regulatory Body

Monetary Authority of Singapore (MAS).


MAS acts as a fiscal agent of the Singapore
Government.

Continued

Types of Singapore Government Securities (SGS)


3-month Treasury Bill
1-year Treasury Bill
2-5-7-10-15-year Treasury Bond
3-month T-bills are issued weekly.
1-year T-bills, 2-5-7-10- and 15-year bonds are
issued according to an annual issuance calendar.

T-Bill Issuing Method and


Prices

Typical Denomination: S$ 1000 & multiples of S$1000


Registered Book-Entry System/ Scripless
Yield Auctions (offering through 11-Primary Dealers)
Competitive Bids & Non Competitive Bids
MAS can participate but only on a non-competitive
basis for up to 20 % of each issue.
Lowest Yield Wins (multiple prices/yields, Weighted
Average Price/Yield for non-competitive bids)
Issued Prices: Zero Coupon, Issued at Discount
(Discount Basis) and Redeemed at Par
91-day T-Bill Application & Result

T-bill Trading System


SGS are not listed on the Singapore Exchange
SGS are traded at OTC market (Dealer to
Dealer/Dealer to Broker)
Trading Basis: Prices to two decimal places
Typical Transaction Size: S$ 5 million
Settlement Date: Trade Date+1 (S=T+1)
Clearing System: DVP basis over MAS
Electronic Payment System and MAS SGS
Book-Entry Clearing System

Singapore Government Bond


Issuing Method and Prices

Issued at Fixed Coupon Rate


Yield Auction (Dutch Auction/Highest Accepted Yield/
Uniform Yield or Uniform Prices for All Bids)
Issued Prices: Issued at par (Yield = coupon rate)
Issued at Premium
(Yield is less than coupon rate)
Issued at Discount (Yield is
more than coupon rate)
Coupons/interests are paid semi-annually
5-year Bond Application & Result (Annexe-3a,3b&3c)

Bond Trading Market

Bond Dealers (primary and secondary dealers)


Primary Dealers: 11 Approved Primary
Dealers (DBS, OCBC, UOB, Standard Chartered
Bank etc.)
Primary Dealers provide liquidity by quoting
two-way prices, underwrite issuance at SGS
auctions, provide market feedback to MAS and
assist the development of SGS market.
Secondary Dealers: 20- Approved Secondary
Dealers (merchant banks, securities
companies/stock broking firms)
SGS Broker (Nittan AP)

Continued

Other Participants (Finance Companies, Insurance


Companies, Fund managers, Corporations and
Individuals)
Ex-coupon/ Ex-interest date rule: 3 working days prior
to the coupon date.
Market interest rates and bond prices are reverse
relationship. Interest rates up when bond prices
down. Interest rates down when bond prices up.
SGS T-Bill and T-Bond Daily Prices
Details of Outstanding SGS Bonds
Details of SGS held by MAS

Role of MSEC

Established in 7/6/1996
50%-50% Joint Venture of MEB and DIR (Japan)
MSECs Services
Assisting companies going public
Helping investors in securities investments
Acting as an intermediary in securities trading
Maintaining a fair and efficient market for shares and
bonds
Supplying information for investment
Advising foreign funds to enter into Myanmar

Myanmar Government
Treasury Bonds

Short-Term Government Bond (less than one year)


3-month Treasury Bills
Medium-Term Government Bond
2-year Government treasury Bonds
3-year Government Treasury Bonds
5-year Government Treasury Bonds
The CBM is the fiscal agent of the Government.
Amount to be issued and redeemed for Treasury
Bonds is estimated in the annual budget.

Short Term Government


Bonds

Three-month Treasury Bills


Non-Marketable Bond
The CBM is sole subscriber.
Fixed Interest Rate: 4% per annum
Issued at par with interest rate basis
(not discount basis)
Allow to rollover at the time of maturity

Medium Term Government


Bonds

Two-year, Three-year and Five-year treasury bonds


Marketable bond
Issued at par and paid interests semi-annually
Flexible Interest Rate Bond
10.5% for two-year treasury bonds
11% for three-year treasury bonds
11.5% for five-year treasury bond
Denominations: K10000, K100000, K1 mil. K.10 mil.

Type of Investors

Institutional Investors (Private Banks, Myanma


Insurance)
Individual Investors
Treasury bonds outstanding as at end of Sept.,2010
3-year T-bonds held by individual investors:486 mil.
3-year T-bonds held by institutional investor:726750.30 mil.
5-year T-bonds held by individual investors:9343.16 mil.
5-year T-bonds held by institutional investor:394943 mil.

Continued

Over 99 % of the outstanding bonds held by


the institutional investors

Over 64% of the outstanding bonds


represents Three-year treasury bonds

Secondary Market

MSEC acts as a market maker


Quotations for T-bond are expressed in Yield Basis.
Bid Price: + 2% + on coupon rate for bid price,
Ask Price: + 1%+ on coupon rate for ask price)
A very thin Trading Market
Discount window at the CBM for the liquidity of private
banks
15% withholding tax on income (abolished on
27/8/1995)
No capital gain tax and transfer tax (capital gain tax
to be levied as per amendment of income tax law)

Some Facts to be Considered


for the Development of Bond
Market

Negative interest rate


Inherent risk in Government treasury bond
Over 40000 Companies Ltd. as at Dec., 2004 of which
No. of Public Limited Companies is about 30.
A few qualified issuers
A few institutional investors other than private banks
Rely on indirect financing rather than direct financing
Less fund available for investments in the transition
economy

Thank You
For Your Attention
and Time!
Any Questions Please?