Bonds make up a substantial portion of the global investment platter. In established
financial markets like the U.S., thousands of different bonds are available.
The U.S. government issues bonds and notes through the Treasury Department and various
federal agencies. Billions of dollars worth of new bonds are issued each year at
auctions to accommodate the ever-growing demand of foreign players both intemational
and domestic. There are many bond players around the world who trade daily in the
U.S. bond markets.
To many investors, bonds seem to be a relatively simple instrument. It is a rather
simple relationship between a debtor and a creditor. The issuer who is also the debtor
returns the principal value when the particular bond matures. Prior to maturity date,
the bondholder will receive fixed-income returns in the form of interest rate payments.
Bonds issued by the government are normally guaranteed or risk-free. Bonds may have
different features. They may be converted to shares (convertible bonds) or have detachable
warrants.
What is a bond fund? It is basically similar to a unit trust fund but its investment
menu comprises basically of bonds and not shares. It is a managed fund with invest
ments on fixed-income securities listed on the KLSE, corporate bonds traded in the
money market, Malaysian Government Securities, treasury bills, foreign fixed income
securities/bonds, Malaysian currency deposits, Cagamas bonds or bankers' acceptances.
Currently there are four bond funds available in the local market. Table 1 depicts
the performances for all funds in 1996. Analysis include only those funds that have
operated for one full year. From the table, bond funds have generally delivered higher
retums than fixed deposits in 1996 amid the high interest rate environment.
Why bonds after all? Investors who are looking for greater security in the form of
predictable income should seriously consider investing in this type of investment.
Bonds very often could offer returns better than some stocks. In addition, reliable
and regular income offer you greater peace of mind.
In periods of falling interest rates, bonds can produce handsome gains. This is because
prices of bonds rise when interest rates fall. There is potential for capital appreciation
in addition to fixed interest payments.
One might dispute that bond investments could be not so rewarding when interest rates
rise. Yes, it is true that bond prices would drop when there is interest rate appreciation.
However, you will be compensated with higher yields, and if you do not turn around
and sell them, you will be assured of the principal of the upon maturity (assuming
the issuer does not default).
For the purpose of protecting investors in Malaysia, bonds are rated by Rating Agency
of Malaysia (RAM) and Malaysian Rating Corporation Berhad (MRCB). The independent
rating helps potential investors to determine the quality of bonds and safety of
timely repayment of principal and interest.
For illustration, MRCB's Long Term Debt Ratings apply debt issues with maturities
of more than one year. Unlike bonds, stocks prices are not guaranteed regardless
of the holding period.
In fact most investors purchase bonds for its fixed income characteristic rather
than for capital appreciation. Nevertheless, increased volatility in interest rates
in the overseas markets have been swinging bonds prices as aggressively as stocks.
This is perhaps something that speculative Malaysian investors are looking for.
Turbulent interest rate environment should not bother you that much if you are long-term
oriented and plan to set aside a portion of your investments for your retirement
for instance.
The more important aspect of bond investment is diversification for your investment
portfolio. Compared to stocks, bonds are a good source for diversification since
they generally imply lower risks. The fixed-income characteristics should also improve
the liquidity of your investment portfolio.
