Bond Pricing Agency - Malaysia

Pricing Mechanism For Sukuk
And Bond Structures
Malaysias First Bond Pricing Agency

Meor Amri Meor Ayob
Copyright BOND PRICING AGENCY MALAYSIA SDN.BHD. (FORMERLY BONDWEB MALAYSIA SDN BHD) - All rights reserved.
Bond Market Growth in Malaysia

The Malaysian bond market has seen tremendous growth over the past years
Private Debt Securities (PDS) emerged
as the largest source of private sector
financing in the aftermath of the 1997
financial crisis
It was reported that Malaysias Islamic
bond market grew over 80% over the last
5 years, with a 96% y-o-y growth in long
term PDS market for the year 2007
Malaysia accounts for two thirds of
global Islamic bonds outstanding in
2007
96% y-o-y
growth in
Islamic
PDS
Binariang GSMs Senior Islamic bond

issuance worth RM20 billion is the
largest corporate bond issue in Malaysia
yet
* Long term PDS are notes that are above 1 year in tenure and would naturally exclude commercial papers, BNM notes, repos and other related papers
Copyright BOND PRICING AGENCY MALAYSIA SDN.BHD (FORMERLY BONDWEB MALAYSIA SDN BHD). - All rights
d

Activity in the secondary market has been consistent
Despite the growth in bond
issuances, liquidity and activity in the
secondary market has not grown in
tandem
Liquidity has been observed to be active
for better credit quality papers
Key issue in the lack of liquidity is price
and information transparency
d

A number of Islamic concepts have been applied in the structuring of Islamic bonds
Islamic concepts applied in various
bonds :
9Al Bai Bithaman Ajil
9Al Qardhul Hasan
9Bai' Bi Al-Taqsit
9Bai Dayn
9Bai Dayn & Murabahah
9Bai-Al-Einah
9Ijarah
9Istisna
9Mudharabah
9Murabahah
9Musyarakah
Combinations include:
9Al Bai Bithaman Ajil & Bai Einah
9Mudharabah & Murabahah
9Murabahah & Bai Al Dayn
9Murabahah & Musyarakah
9Murabahah & Ijarah
9Istisna & Mudharabah
d
The Role of Bond Pricing

The Solution
Problem
Less than 1% are traded, where are the
prices for the remaining 99%?
The Need
Daily valuation of bond portfolios for NAV
calculation and portfolio valuation
9The BPA evaluates about 2,000+ bonds that

are not traded on any given day, based on the
market prices
9The BPA needs to employ reliable database
and evaluation methodology. This
methodology MUST be transparent and
consistent
Current method
Quotes from brokers or banks, a few via
internally generated models bias?
d
Benefits of Bond Pricing for the Bond Market

Revitalizing
Revitalizingthe
the
Secondary
Secondary
Market
Marketfor
forBonds
Bonds
9BPA valuation approved by the SC may revitalize the bond market using mark-to-market
prices as benchmark by publicly announcing them
9Marking-to-market system provide strategy alternatives to traditional hold-to-maturity
strategies.
Revitalizing
Revitalizingthe
the
Primary
PrimaryMarket
Market
for
forBonds
Bonds
9From an origination and underwriting perspective, primary level pricing becomes

challenging especially for lower credits
9Mark-to-market pricing on previously issued corporate bonds can promote new corporate
bond issues by functioning as benchmarks for primary level pricing
Promoting
PromotingNew
New
Product
Product
Development
Development
9BPAs transparency in the methodologies being used will spur the evolution of the bond
market with further advance pricing methodologies
9When advance pricing methodologies are established, it will encourage more bond
offerings and more active trading of these products in the secondary market.
Improving
Improvingthe
the
Soundness
Soundnessofof
Financial
Financial
Institutions
Institutions
9Providing price discovery may assist in financial institutions' compliance to international

standards such as IAS 39 and Basel II requirements.
9Effectiveness of risk management will be further enhanced as the valuation process will be
consistent and not arbitrary
d
Delivery Channels
For 2000+ stocks delivered via a .csv (excel) file daily at 6.00 pm
BOND CODE
MO060001
MS03001S
MS03002H
MZ98005A
MS04003H
MY050003
MX060002
DE060266
KV96101E
PS93004H
KV95001T
GG04001F
GI03001W
GI04003N
GK04002F
CI02014T
CI02025A
CI03007S
CK02006N
DN97062W
DN97099H
DS97120S
QK00001W
QI03001A
ISIN CODE
MYBMO0600019
MYBMS03001S9
MYBMS03002H0
MYBMZ98005A5
MYBMS04003H7
MYBMY0500036
MYBMX0600028
MYBDE0602668
MYBKV96101E2
MYBPS93004H4
MYBKV95001T3
MYBGG04001F7
MYBGI03001W1
MYBGI04003N5
MYBGK04002F9
MYBCI02014T5
MYBCI02025A1
MYBCI03007S0
MYBCK02006N0
MYBDN97062W6
MYBDN97099H9
MYBDS97120S5
MYBQK00001W8
MYBQI03001A5
BOND NAME
VALUE DATE MTM PRICE MTM YIELD LAST PRICE LAST YIELD LAST DATE DURATIONCONVEXITY
MGS 1/2006 4.262% 15.09.2016
17-Jan-07
103.89
3.78
103.85
3.78
16-Jan-07
7.79
72.77
MGS 1/2003 4.41000% 29.01.2018
17-Jan-07
105.42
3.8
0
0
8.58
89.86
MGS 2/2003 4.24000% 07.02.2018
17-Jan-07
103.9
3.8
0
0
8.66
91.06
MGS 5/1998 8.000% 20Y 30102018
17-Jan-07
139.47
3.81
0
0
8.23
87.15
MGS 3/2004 5.734% 30.07.2019
17-Jan-07
118.76
3.84
118
3.91 11-Dec-06
9.04
103.67
MGS 3/2005 4.837% 15.07.2025
17-Jan-07
110.58
4.02
110.59
4.02
10-Jan-07
12.43
199.78
MGS 2/2006 4.709% 15.09.2026
17-Jan-07
108.74
4.06
108.75
4.06
16-Jan-07
12.78
216.26
CAGN 1/2006 364D 25.05.2007
17-Jan-07
98.7
3.76
98.65
3.76
12-Jan-07
0.35
0.24
KLIA 0.000% 30.01.2016 PN
17-Jan-07
128.29
3.99
128.27
3.99
15-Jan-07
6.65
56.4
YTL POWER 10.000% 30.10.2008 PN
17-Jan-07
110.58
3.82
0
0
1.64
3.61
KLIA 7.750% 17.01.2015 PN
17-Jan-07
126.63
3.85
121.06
5.45 04-Mar-02
6.21
47.52
GII 1/2004 0.00000% 15.06.2007
17-Jan-07
98.62
3.43
98.42
3.7
08-Jan-07
0.4
0.32
GII 1/2003 0.00000% 31.03.2008
17-Jan-07
95.84
3.57
95.35
3.61 27-Nov-06
1.18
1.98
GII 3/2004 0.00000% 29.10.2009
17-Jan-07
90.4
3.66
86.93
4.15 24-May-06
2.73
8.81
GII 2/2004 0.00000% 30.09.2011
17-Jan-07
84.1
3.72
83.85
3.71 14-Dec-06
4.62
23.6
SMC 14/2002 23.04.2007
17-Jan-07
100.13
3.62
99.25
4.82 28-Dec-05
0.26
0.14
SMC 25/2002 22.08.2007
17-Jan-07
100.14
3.68
100.05
3.98
04-Oct-02
0.57
0.62
SMC 7/2003 11.04.2008
17-Jan-07
99.67
3.78
99.7
3.73 01-Dec-06
1.18
2.01
SMC 6/2002 26.02.2009
17-Jan-07
101.2
3.82
99.91
4.45 28-Dec-05
1.97
4.99
PERWAJA 0.000% 31.07.2007 PN
17-Jan-07
102.5
3.52
107.47
3.59 29-Nov-05
0.51
0.52
TENAGA 0.000% 01.10.2007 PN
17-Jan-07
102.86
3.81
103.73
3.81
30-Oct-06
0.67
0.79
TENAGA 0.000% 01.10.2012 PN
17-Jan-07
119.85
4.33
119.63
4.74
04-Apr-06
4.57
25.99
KHA1/00 1.02B 0-CP 7YR 20/3/2007
17-Jan-07
99.4
3.57
98.41
3.65
10-Oct-06
0.17
0.06
KHA1/03 1B 0-CP 5Y 18/6/08
17-Jan-07
94.96
3.68
93.87
3.8
11-Oct-06
1.39
2.63
d
What Is A Bond Pricing Agency

BPAs are new entities and currently only three countries use the BPA framework
Korea
Thailand
Egypt (in development)
Mexico
Malaysia
Indonesia (in development)
Mexico
9Two price vendors under
the purview of Banco De
Mexico
Malaysia
9Bondweb Malaysia Sdn Bhd
Thailand
9Thai Bond Market Association (SRO)
d
Korea
9Korea Bond Pricing
9KIS Pricing, Inc
9NICE Pricing Services, Inc
Bond Pricing Regulations

BPA Registration Requirements
As per SC Guidelines on the Registration of Bond Pricing Agencies dated 25 January 2006 strict requirements to qualify covering:
Methodology and Process :
Audited
Pricing performance :
3 month market acceptance test
Expertise :
Fit and proper persons
System:
Adequate security and backup
Shareholders :
No controlling party
Minimum paid up capital :
RM 10 million
Professional indemnity insurance : RM 10 million
Bond Pricing Agency Malaysia has met and exceeded these requirements, and was appointed
as the first registered Bond Pricing Agency on 18th April 2006
d
The Nature of Bond Pricing Business
d
Introducing Bond Pricing Agency Malaysia Sdn Bhd

Bond Pricing Agency Malaysia Sdn Bhd (BPAM) was established in 2004
9 With participation from:

MARC and RAM on data and technical
support
SC and BNM in observer and advisory role
Market community (buy/sell side, brokers)
via
Bottom Up approach
9 Adhered to strict SC requirements to qualify as
BPA:
Audited methodology and process
Three months market acceptance test
RM10 million minimum paid up capital and
professional indemnity insurance
No controlling shareholders
d
Compliance and Quality Assurance

Bond Pricing Agency Malaysia (BPAM) is currently the only registered Bond Pricing
Agency (BPA) with the Securities Commission

BPAM meets and exceeds the requirements set out in the Guidelines on the
Registration of Bond Pricing Agencies dated 25 January 2006
The Securities Commission issued Guidance Note 15 dated 15 December 2006 pursuant to the
Guidelines on Unit Trusts Funds, which outlined the policy for Unit Trusts on use of BPA prices:
Funds investing in Ringgit-denominated bonds shall value bond portfolios on daily basis using
fair value prices quoted by a Bond Pricing Agency (BPA) registered with the SC.
BPAM is already supporting the implementation of the Basel II, IAS 39 and Risk Based
Capital requirement for banks and insurance companies
Therefore, BPAM is fully compliant to meet the needs of Unit Trust Management
Companies, Asset Managers and Financial Institutions with regard to the provision of
Fair Value Bond Prices
d
BPAM Clients
d
BPAM Clients
d
Pricing Process
BPAMs Bond Pricing Services
9 BPAM provides valuations on a daily basis at INDIVIDUAL bond level
9 A comprehensive data collection, validation, pricing and dissemination process is in place to
ensure consistent and market neutral valuations
9 The bond pricing process is transparent and uses global standard pricing models
9 The models are customized to meet the unique needs of the Malaysian market
9 BPAM prices unlisted MYR bonds (Conventional and Islamic). For now we do not price short
term papers, unrated bonds, loan stocks and listed bonds
9 We incorporate a market feedback mechanism in the event where there are disputes or queries
on the prices
9 Intimate local knowledge of the instruments and market structure is vital to ensure credibility of
the BPA
d
Pricing Methodology
Bond Pricing Approach Current Industry Practice and the Assumptions
YTM
YTMMatrix
Matrix/ /
Curve
CurvePricing
Pricing
Individual
Individual
Quotation
Quotation
Approach
Approach
Model
Model
Approach
Approach
(Mark
(MarkTo
To
Model)
Model)
Four common market practices are used in conducting bond pricing.

BPAM employs the hybrid approach
Approach Type
Pricing Method
Granularity
YTM Matrix / Curve

Pricing
Quote Driven
Curve Pricing
Individual Quotation
Approach
Quote Driven
Individual Bond
Model Approach
Theoretical
Individual Bond
Hybrid Approach
Hybrid
Individual Bond
Hybrid
Hybrid
Approach
Approach
d
Pricing Methodology
BPAMs Pricing Methodology An Overview
Bond Price = f ( Benchmark Rates
Y
i
e
l
d
Credit Spread )
Derivation of benchmark rate
Credit Risk
Liquidity
Risk
Risk
Term to Maturity
Segmentation Cube
Quotations
Individual Bonds
Trades
Measuring the
Market Price
Of Risk
Individual Bond
Valuation
d
Pricing Process
Price All Bonds
Pricing for un-traded or rarely traded bonds
9 Obtain a base spread from the past real transaction
data
9 Track the change of spread over time
9 Estimate the spread of the bond relative to
changes in the yield curves and other peer group
Y
i
e
l
d
Yield curve(AA)
20bp
Spread(AA)
Real Transaction
Evaluation Yield
20bp
15bp
Spread of specific bond

Base yield curve
(AAA)
15bp
Ev
o
ati
alu
ate
D
n
Term
to M
d
atur
it y
Pricing Methodology
Bond types identified and priced by BPAM in the MYR market:
Callable Amortizing Bonds with Secondary Notes Callable Stepping Bonds
Callable Stepping Amortizing Bonds
Discount Bonds
Convertible Stepping Bonds
Bullet Bonds
Callable Bonds with Secondary Notes
Fixed Rate Bonds
Convertible Bonds with Secondary Notes
Amortizing Bonds
Callable Bonds
Convertible Bonds
Exchange Bonds
Bond with Warrants
As of April 2008:
Fixed Rate ABS
Total stocks in the market:
2693
Callable ABS
Fixed Rate MBS
Priced by BPAM:
1908
Callable MBS
Stepping FRB
Floating Rate Notes
Floating Amortizing Notes
Floating Rate ABS
Floating Rate MBS
Bond with Secondary Notes
Amortizing Bonds with Secondary Notes
Callable Amortizing Bonds
Stepping Amortizing Bonds
d
Pricing Methodology
Price All Bonds
Apply relevant bond type price formula
Eg1 : Fixed coupon bonds with regular period
1
c
F
F
100
f
+
AI
1
( k 1+ D 2 )
y
y
1
( n 1+ D 2 )
D
k =1
D
(1 +
)
(1 +
)
100 f
100 f
n
Eg2 : Fixed coupon bonds with short first coupon
c
1 FIF
c
1
F
F
n
F
f
E
f
100
100
+
+
AI
2
2
D
D
y
y
y
1
1 ( k 1+ E )
1 ( n 1+ D 2 E )
E
k =2
(1 +
)
(1 +
)
(1 +
)
100 f
100 f
100 f
Notation
f
c
F
y
AI
D
D2
n
E/U
Eg3 : Fixed coupon bonds long first coupon
c
c
1
1 LIF
F
F
n1
F
f
f U
100
100
+
+
AI
LIF D 2
LIF
D
2
y 1 (k 1+ D)
y 1 (n1+ U + U )
y 1 (n1+ U +D2U )
k =1
)
(1 +
(1+
(1+
)
)
100 f
100 f
100 f
FIF / LIF
* Price computed using yield derived from the

(credit spot rate at discount period t + individual spread)
d
Descriptions
Coupon payment frequency in a year
Coupon rate
Face amount = Notional
Yield *
Accrued Interest
No. of days in one regular coupon
period
No. of days between the value date and
the next coupon Date
Last coupon period
No. of days between the pseudo issue /
real last coupon date and the real first
coupon / pseudo maturity date (short
first / last coupon)
No. of days between the pseudo issue /
pseudo last coupon date and the
pseudo first coupon / pseudo maturity
date (long first coupon)
No. of days between the real issue date
/ real last coupon and the real first
coupon / real maturity date
(Short First / Last Coupon Bond)
No. of days between the real issue /
pseudo last coupon date and the
pseudo first coupon / real maturity date
(Long First / Last Coupon Bond)
Bond Pricing, Current Practice and Pricing Issue

Sophisticated pricing methodologies are not used due to the lack of transparent data.
Advanced pricing methodologies are still in primitive development.
Example: Pricing of option embedded bonds current practice
I
I
I
I
First Call Date
Interest
Payment
Principle
Payment
Legal Maturity
c
1
F
F
100
f
P=
+
AI
y 1 ( k 1+ D 2 D )
y
( n ' 1+ D 2 )
1
k =1
D
(1 +
)
(1 +
)
100 f
100 f
n'
where n' = first call date
9 Current market practice is to price option embedded bonds to the first call
9 Cash flow after first call is discarded
9 Assumption is flawed
9 There are also no difference in pricing of American, European and Bermudan option
d

Theoretical Method in Pricing of Bonds with Embedded Options
Example: Pricing of option embedded bonds One Factor Hull & White Trinomial Tree
1) The price of option embedded bond can be computed by backwardation through an interest rate tree as follows:
P(T+1;up)
At time T, the non-exercise price can be computed by:

Pnonexer (T ) = exp(r t ) [ P(T + 1; up) * prob(up)
+ P(T + 1; mid ) * prob(mid )
P(T)
P(T+1;mid)
+ P(T + 1; dw) * prob(dw)]
If the option is call and the exercise price at T is C, then the price of
option bond at T can be determined as follows:
P(T+1;dw)
P(T) = min [ C, Pnonexer (T ) ]

So, the price of option embedded bond is P(0).
2) Hull and White suggested a two-stage method to generate the interest rate tree using the basic formula:
dr = [ (t ) ar ]dt + dz
(t )
: the coefficient
of long term mean
a
: mean speed
: the volatility
of short term interest rate
d

2) Hull and White suggested a two-stage method to generate the interest rate tree.
a) The first stage in building a tree for this model is to build a tree for a
*
variabler
7 a 2 j 2 t 2 3ajt
+
6
2
1
2 2
Pm = a j t 2 + 2ajt
3
1 a 2 j 2 t 2 ajt
Pd = +
6
2
Pu =
that is initially zero following
*
*
the process dr = ar dt + dz .
1 a 2 j 2 t 2 ajt
+
6
2
2
Pm = a 2 j 2 t 2
3
1 a 2 j 2 t 2 + ajt
Pd = +
6
2
Pu =
Assumption: (t ) = 0 , r (0) = 0
*
*
First Stage Model: dr = ar dt + dz
*
*
Parameter Setting: R = 3t , t = it , R = jR
0.184
0.816
j max : Minimum integer between
and
, j min = j max
at
at
Tree expansion: If the short-term interest reaches the two boundaries
j max
Pu , Pm ,(Pd
j min
or goes down
, then the probabilities to up, middle, down
1 a 2 j 2 t 2 + ajt
+
6
2
1
Pm = a 2 j 2 t 2 2ajt
3
7 a 2 j 2 t 2 + 3ajt
Pd = +
6
2
Pu =
) will change.
d

2) Hull and White suggested a two-stage method to generate the interest rate tree.
*
b) The second stage in the tree construction is to convert the tree r into a tree for r . This is accomplished by
displacing the nodes on the
*
r-tree
so that the initial term structure is exactly matched. The approach is to
*
set the interest rates on r-tree at time it to be equal to the corresponding interest rates on r -tree plus
(it ) while keeping the probabilities the same. The procedure is to calculate s iteratively so that the initial
term structure is matched.
*
Define (t ) = r (t ) r (t ) d (t ) = [ (t ) a (t )]dt
can be calculated as follows:

Qi , j : Present value of security, which gives $1 at (i,j) node ( Q0, 0 = 1 ), 0 = initial t -period interest rate,
given by term structure)

Qi +1, j = Qi , k p (k , j ) exp[( i + kR)t ]
k
where p ( k , j ) : transition probability from node (i,k) to node (i+1,j) ( Pu , Pm , Pd )

Pi +1 = Qi , j exp[ ( i + jR ) t ] i =
ln Qi , j e jRt ln Pi +1
j
t
where P is the price computed from the current term structure of interest rate
j
d
Bond Pricing, Current Practice and Pricing Issues Islamic
Valuation method of Sukuks are indifferent to conventional bonds in market practice.

Syariah principles conformed via product structuring
Fixed Payment Bond
Conventional
I
I
Interest
Payment
Principle
Payment
Islamic
SN
SN
Fixed Payment Bond Formula

1
c
F
n
F
100
f
+
Accrued Interest
P=
2
D
y 1 ( k 1+ D )
y 1 ( n1+ D 2 D )
k =1
(1 +
(1 +
)
)
100 f
100 f
Notation
f
c
F
y
D
D2
n
P
Descriptions
Payment frequency in a year
Cash flow rate
Face amount = Notional
Yield
No. of days in one regular coupon period
No. of days between the value date and the next payment date
Last payment period
Clean Price
9 Secondary Note in Islamic structure acts as the fixed profit payment as

agreed in the contract.
SN
SN
PN
Conventional valuation formula used
PN
Secondary
Note
Primary
Note
9 Cash flow rate in Islamic structure derived as the ratio between the
secondary note amount and the primary note amount
9 Primary amount is the face amount
d
Bond Pricing, Current Practice and Pricing Issues - Islamic

Islamic and conventional bonds are fundamentally different in both structure and thus
valuation
Islamic Bond Differences from Conventional Bonds
Not an exchange of paper or money but an exchange of
Syariah approved assets
In principle, Islamic bond structure is similar to asset
securitisation
Many more unaccounted

Islamic features in current
market valuation
Inclusion of asset volatility
Differing market perception resulting in differentiated trading

behaviour liquidity, risk premium, etc.
Term structure of asset
No imposition of interest but uses secondary notes as profit

payments
Floating rate mechanism for the forward rate

agreement in the unconditional and
irrevocable purchase of asset at maturity
Profit earned through financial consideration for the

exchange by applying Syariah principles
Prepayment risk modeling
Additional risks that are uncommon in conventional bonds

such as religious and regulatory risks
Counterparty risk modeling
Rather than relying on the performance of the underlying assets, Islamic bonds are currently
priced as per their conventional counterparts and almost arbitrarily.
d

Example KL Sentral Sdn Bhd (KLSSB) Musyarakah Venture with Kuwait Finance House
(KFH) as option writer
Market prices KLSSB as a fixed
payment bond to legal maturity
disregarding asset issues.
Investors
KLSSB issues
Sukuk and
receives
proceeds in
return
Proceeds
from PU for
Sukuk
redemption
and profit
payments
Trustee
Trustee
overseeing the
Musyarakah
Bond has pricing issue on asset pricing

Cashflow payments in arrears via
aggregated project revenue
Unconditional and irrevocable
purchase of assets
Musyarakah
partners
appoint
KLSSB as the
Project Agent
KLSSB
KLSSB
(as Wakeel to Investors)
Put
Option
4
Purchase Undertaking (PU)
KFH
Put
Option
terms and
conditions
Forward pricing of assets require a forward rate

benchmark of asset class
Consideration must be taken for counterparty risk at the
end of the contract
Bond has pricing issue on assets embedded option
IHH
Distributable profit to be
shared semi-annually
based on an agreed profit
sharing ration of 99%:1% to
KLSSB and Sukukholders
Stake of Musyarakah
partners based on their
capital contribution of 74:26
from KLSSB (in kind) and
Sukukholders (cash)
IH
IHL
I0
ILH
IL
ILL
Musyarakah Venture to sell

Project Lands
Asset volatility and term structure of asset class.

Eg equity industry index volatility
Asset data greatly needed
Optionality of the put/call feature
d

In asset pricing, many considerations must be taken in the cash flow structure and risk
exposure
Cash Flow
Sale
Price
Delivery
Discount
Immediate
Negotiated
Mark up
Deferred
End of
Period
Lease
Payment
Price
Delivery
Advance
Discount
Immediate
Advance
Discount
Advance
Staggered
End of
Period
Negotiated
Mark up
Deferred
End of
Period
Staggered
End of
Period
Negotiated
Mark up
Staggered
End of
Period
Risk Exposure to Asset

Asset
Entity
Property
Equity
Usufruct
Fixed
Fixed
On Issuer
Floating
Floating
On the
Business
Payment
Price
Payment
9Breakdown necessary to avoid mismatch in the Islamic

bonds risk consideration
9Sukuk contract is the cosmetic of the asset
9Key challenge is on data aggregation on

specific asset classes and using these
information in pricing models
d
THANK YOU
No. 17-8 & 19-8 , The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur, Malaysia
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Bond Pricing Agency - Malaysia

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Bond Pricing Agency - Malaysia

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Pricing Mechanism For Sukuk

And Bond Structures

Malaysias First Bond Pricing Agency

Bond Market Growth in Malaysia

Binariang GSMs Senior Islamic bond

Bond Market Growth in Malaysia

Bond Market Growth in Malaysia

The Role of Bond Pricing

9The BPA evaluates about 2,000+ bonds that

Benefits of Bond Pricing for the Bond Market

9From an origination and underwriting perspective, primary level pricing becomes

9Providing price discovery may assist in financial institutions' compliance to international

What Is A Bond Pricing Agency

Bond Pricing Regulations

Methodology and Process :

3 month market acceptance test

Fit and proper persons

Adequate security and backup

Minimum paid up capital :

Professional indemnity insurance : RM 10 million

The Nature of Bond Pricing Business

Introducing Bond Pricing Agency Malaysia Sdn Bhd

9 With participation from:

Compliance and Quality Assurance

Agency (BPA) with the Securities Commission

Four common market practices are used in conducting bond pricing.

YTM Matrix / Curve

Derivation of benchmark rate

Spread of specific bond

Eg2 : Fixed coupon bonds with short first coupon

Eg3 : Fixed coupon bonds long first coupon

* Price computed using yield derived from the

Bond Pricing, Current Practice and Pricing Issue

First Call Date

where n' = first call date

Bond Pricing, Current Practice and Pricing Issue

At time T, the non-exercise price can be computed by:

+ P(T + 1; dw) * prob(dw)]

P(T) = min [ C, Pnonexer (T ) ]

Bond Pricing, Current Practice and Pricing Issue

that is initially zero following

Bond Pricing, Current Practice and Pricing Issue

can be calculated as follows:

given by term structure)

where p ( k , j ) : transition probability from node (i,k) to node (i+1,j) ( Pu , Pm , Pd )

Bond Pricing, Current Practice and Pricing Issues Islamic

Valuation method of Sukuks are indifferent to conventional bonds in market practice.

Fixed Payment Bond Formula

9 Secondary Note in Islamic structure acts as the fixed profit payment as

Conventional valuation formula used

Bond Pricing, Current Practice and Pricing Issues - Islamic

Many more unaccounted

Inclusion of asset volatility

Differing market perception resulting in differentiated trading

Term structure of asset

No imposition of interest but uses secondary notes as profit

Floating rate mechanism for the forward rate

Profit earned through financial consideration for the

Prepayment risk modeling

Additional risks that are uncommon in conventional bonds

Counterparty risk modeling

Bond Pricing, Current Practice and Pricing Issues - Islamic

Bond has pricing issue on asset pricing