What Is Fixed Income?
Fixed-income securities are debt instruments that pay investors a fixed interest or coupon payments until they reach their maturity date. At maturity, investors will be repaid the initial amount they invested.
In Malaysia, fixed-income products are typically segregated into public and private debt securities. The public debt securities are debt securities issued by the Malaysian Government which includes Malaysian Government Securities, Malaysian Government Investment Issues, Malaysian Treasury Bills, Malaysian Islamic Treasury Bills, and others. While private debt securities include bonds, notes or sukuk issued by corporates in the private sectors.
Types of Fixed Income?
In this paragraph, we will provide a brief description of some of the commonly seen debt securities in Malaysia.
1. Public Debt Securities
The Malaysian government raises financing via the issuance of Malaysian Government Securities (‘MGS”) and Malaysian Government Investment Issue (“MGII”). MGS is a conventional bond while MGII is a sukuk.
a. Malaysian Government Securities (MGS)
MGSs are long-term bonds issued by the Malaysian government to raise funds for development expenditure. These coupon-bearing bonds pay interest on a semi-annual basis and are the most actively traded bonds in the Malaysian bond market.
The tenure of MGSs can range from 3 -20 years and the bonds are issued via competitive auction by BNM on behalf of the Government. Successful bidders are determined according to the lowest yields offered and the coupon rate is fixed at the weighted average yield of successful bids.
b. Malaysian Government Investment Issues (MGII)
MGIIs are non-interest bearing government securities based on Islamic principles, of which proceeds raised are typically used to fund development related expenditure.
Similar to MGSs, MGIIs are issued through competitive auction by BNM on behalf of the Government. The issuance size for GII can range from RM2 – RM 5 billion while the maturities of GIIs can range from 3 – 15 years. The profit payment for semi-annual and the profit rate is determined based on the weighted average yield of successful issue.
Effective from July 22, 2013, MGIIs are issued based on the Murabahah concept. This concept is essentially a certificate of indebtedness arising from a deferred mark-up sale transaction of an asset, such as commodities like crude palm oil, which complies with Shariah Principles. In simpler terms, this means the buyer agrees to purchase the asset at a mark-up price, but pays for it at a later date. Thus, creating a form of indebtedness between the government and investors through commodity transactions.
2. Private Debt Securities
In Malaysia, private debt securities (PDS) come in various types, catering to different preferences and needs. Below is a brief description on some of the various PDS.
a. Corporate Bonds
A corporate bond is a bond that is raised by corporate companies (listed and non-listed) to raise money from investors to finance its business activities. In return, the company issuing the bonds will pay the investor (i) interest (often known as coupon payment) and (ii) the money which the investor initially invested (also known as principal) on a certain date (typically at maturity).
b. Commercial Papers
Commercial paper is a short-term debt instrument, adhering either to conventional or Islamic principles, with initial durations ranging from 1 month to 1 year. They’re typically issued by corporations to fund short term financial obligations and is often rolled over until the expiry of an issuance program.
Given the short-term nature of the instrument, many investors will hold the commercial paper until maturity.
c. Medium-term Notes
Commercial paper is a short-term debt instrument, adhering either to conventional or Islamic principles, with initial durations ranging from 1 month to 1 year. Medium-Term Notes (MTN) are debt instruments with a maturity that typically exceeds 1 year and are redeemable at par upon maturity.
These instruments were designed to fill the gap between short-term commercial paper and long-term corporate bonds.
MTNs may carry fixed or floating rate coupons and may be issued both on conventional or Islamic principles and by direct placement or tender.
d. Investment Notes
In Malaysia, investment notes are loan/financing agreements executed or offered on electronic platforms such as peer-to-peer platforms that are registered and recognised by the Securities Commission.
There is also Islamic notes. Islamic notes can be issued both on conventional and Islamic principles and is often used by issuers to raise financing from a group of investors for business and working capital as well as financing of invoices.
In return, investors will be repaid in the form of monthly, quarterly or bullet repayments that may include portion of the principal amount and/or interest.
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