According to sources from Bursa Malaysia, bonds or sukuk are fixed income securities or debt securities issued by companies or governments (issuers) to raise funds to meet their financing needs.
While bonds issued in accordance with Shariah principles are known as sukuk.
Bond details include the principal due date the loan is to be paid to the bond owner and usually has conditions for fixed or variable interest payments made by the borrower.
Governments and companies typically use bonds to borrow money. The government needs to fund roads, schools, dams or other infrastructure. War spending also requires a government to raise funds.
The same goes for companies. Companies will often take out loans to grow their business, purchase property and equipment, undertake projects, to carry out research and development or hire employees.
The problem often faced by large organizations is that they need more money than what the bank can provide. Bonds provide a solution by allowing many individual investors to take on the role of lenders.
The public debt market allows thousands of investors to lend a portion of the capital they need. Moreover, the market allows lenders to sell their bonds to other investors or buy bonds from other individuals.
Bonds are often referred to as fixed income securities and are one of three asset classes commonly known to investors, along with stocks and cash equivalents.
Many government and corporate bonds are publicly traded. Some are also traded over the counter or privately between borrowers and creditors.
When a company or other entity wants to raise money to finance a new project, maintain ongoing operations or finance existing debt, they may offer bonds directly to investors.
Borrowers issue bonds that cover the terms of the loan, interest payments to be made and payments on the maturity date of the bonds.
Interest payments are part of the return earned by bondholders for lending their funds to bondholders.
The interest rate that determines the payment is known as the coupon rate.
The original price of most bonds is usually set at the same level, usually between US $ 100 or US $ 1,000 face value per individual bond.
The actual market price of a bond depends on several factors such as the credit quality of the bondholder, the time period until maturity date and the coupon rate compared to the general interest rate environment at that time.
The face value is the amount that must be repaid to the borrower once the bond matures.
A large number of bonds can be sold by current bondholders to other investors after being offered. In other words, bond investors do not have to hold the bond until its maturity date.
Bonds can also be repurchased by borrowers if interest rates have dropped or the borrower’s credit has improved.
There are four main types of bonds that you can buy, namely government bonds, municipal bonds, corporate bonds and ‘high-yield’ bonds.
Government bonds are the lowest risk bonds and are classified as the safest investments because they have very low interest rates compared to other investments.
There are also a handful of governments that issue zero coupon bonds. The bonds are bonds that are sold to investors at a discount to their face value and can be redeemed at face value at maturity.
However, no interest payments are given to investors.
The second bond is a municipal bond. These bonds are issued by the local authority or municipality.
The Pasir Gudang Municipal Council in Johor was the first entity to introduce municipal bonds in the country in 2004. Municipal bonds have almost the same advantages as government bonds.
The third bond is a corporate bond. As explained above, when corporate companies need a certain amount of funds to continue operations, then they can also issue bonds, provided they have a good credit rating.
The return on investment in corporate bonds has lower interest rates but is higher than government bonds.
The last bond is a ‘high-yield’ bond. If you want a higher return than other bond investments, this is an ideal bond. Usually an entity will pay a high premium to investors.
This type of bond investment will not guarantee an initial investment return once it has reached maturity.
