Bond mathematics - the glue that binds Price, Yield and Coupon

Now that we know the relationships between yield, coupon and price, this relationship can be best illustrated with the core mathematical formula that binds all three.

All bond mathematical formula can be traced back to this. As shown above, if the yield moves up, the price will go down.

Definitions of Major Bond Market Terminology

Today's lesson is on definitions of various major bond market terminology. Below is a small list of key terminology:

•Bonds: obligation to pay and/or redeem agreed amounts on specified future dates
•Secured Bonds: security (financial and/or asset) attached to the bonds
•Face Value: the promised value of a bond
•Bond Price: current value of bonds
•Coupon: the periodic payments made by issuers as a form of rental for issuing
•Yield: the actual cost of financing

It is also important to note the relationships between the definitions. Below are the links between the key terminologies.

§Coupon is not related to Yield

§Yield is proportional to Tenure

§Yield is proportional to credit risk

§Coupon is more of a marketing tool

§Coupon is subject to issuer’s cash flow ability

§Yield is inversely proportional Bond Price

A History Lesson on the Development of the Malaysian Bond Market

Today's lesson is a history lesson. A history lesson on how the Malaysian bond market got developed. It started with the developmental needs of the nation which was then young and required a lot of investment.

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The growth of the Malaysian bond market can be traced back to the 1970s, when the Government started issuing bonds to meet the massive funding needs for the country’s development. By the mid-1980s, the private sector had assumed a more important role in the strategic development of the Malaysian economy, with the aim of making it the main driver of growth as well as finance. During that period, the corporate sector had relied heavily on bank loans, which had in turn prompted the Government to pursue the development of the corporate bond market as a key strategic priority. 

Since the introduction of Bank Negara Malaysia’s (the Malaysian Central Bank) Guidelines for the Issuance of Private Debt Securities in January 1989, the domestic bond market has developed significantly in terms of size, efficiency and the array of available debt instruments. The progress achieved to date has rendered the bond market an influential avenue for economic growth.

The Malaysian bond market can be characterised as being in a developing phase. High growth rates have been its hallmark, attributable to increasing recognition of the local bond market as a viable alternative for capital formation. Borrowers can have substantial influence over the structure of a proposed bond issue; coupled with the vast number of potential investors with varying risk appetites, this has effectively fuelled growth. The push by financial institutions to reprioritise lending activities to the retail sector after the regional crisis of the late 1990s has also accelerated market disintermediation, with corporate borrowers moving away from the banking sector to the bond market.

The regulatory push to mould Malaysia into a global hub for the development of Islamic finance is also an important plus for the bond market. On the supply side, the issuance of Islamic sukuks in terms of innovativeness and volume has been equally matched by growth on the demand side. The issuance of new licences for Islamic financial institutions and the rising number of dedicated Islamic sukuk funds all point to a bright future for the Malaysian bond market.

Raising capital for a firm

In business, apart from the business of making money, the next hardest part is getting the necessary capital to start it in the first place. For a firm, there are 4 sources to find capital.

1. Equity market - investment from shareholders is the first port of call for any firm;
2. Banking system - firm can borrow money from banks;
3. Bond market - firm can issue bonds to investors
4. Private sources - any sources that is not from the first 3 listed earlier.

The first posting

This blog is dedicated to the need to give back. I realised that I've taken a lot and it is time for me to contribute back to the society.

Since I am in the finance industry, I will make it a point to share with readers of this blog lessons about the market as well as other items that could be of interest.

So sit back and enjoy the lessons!