Professional Documents
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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
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Bond Market Growth in Malaysia
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
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Bond Market Growth in Malaysia
A number of Islamic concepts have been applied in the structuring of Islamic
bonds Islamic concepts applied in various
bonds :
Al Bai Bithaman Ajil
Al Qardhul Hasan
Bai' Bi Al-Taqsit
Bai Dayn
Bai Dayn & Murabahah
Bai-Al-Einah
Ijarah
Istisna
Mudharabah
Murabahah
Musyarakah
Combinations include:
Al Bai Bithaman Ajil & Bai
Einah
Mudharabah & Murabahah
Murabahah & Bai Al Dayn
Murabahah & Musyarakah
Murabahah & Ijarah
Istisna & Mudharabah
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The Role of Bond Pricing
The Solution
Current method
Quotes from brokers or banks, a few via
internally generated models – bias?
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Benefits of Bond Pricing for the Bond Market
BPA valuation approved by the SC may revitalize the bond market using mark-to-market
Revitalizing the prices as benchmark by publicly announcing them
Secondary Marking-to-market system provide strategy alternatives to traditional hold-to-maturity
Market for Bonds strategies.
BPA’s transparency in the methodologies being used will spur the evolution of the bond
Promoting New market with further advance pricing methodologies
Product When advance pricing methodologies are established, it will encourage more bond
Development offerings and more active trading of these products in the secondary market.
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Delivery Channels
For 2000+ stocks delivered via a .csv (excel) file daily at 6.00 pm
BOND CODE ISIN CODE BOND NAME VALUE DATE MTM PRICE MTM YIELD LAST PRICE LAST YIELD LAST DATE DURATIONCONVEXITY
MO060001 MYBMO0600019 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
MS03001S MYBMS03001S9 MGS 1/2003 4.41000% 29.01.2018 17-Jan-07 105.42 3.8 0 0 8.58 89.86
MS03002H MYBMS03002H0 MGS 2/2003 4.24000% 07.02.2018 17-Jan-07 103.9 3.8 0 0 8.66 91.06
MZ98005A MYBMZ98005A5 MGS 5/1998 8.000% 20Y 30102018 17-Jan-07 139.47 3.81 0 0 8.23 87.15
MS04003H MYBMS04003H7 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
MY050003 MYBMY0500036 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
MX060002 MYBMX0600028 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
DE060266 MYBDE0602668 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
KV96101E MYBKV96101E2 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
PS93004H MYBPS93004H4 YTL POWER 10.000% 30.10.2008 PN 17-Jan-07 110.58 3.82 0 0 1.64 3.61
KV95001T MYBKV95001T3 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
GG04001F MYBGG04001F7 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
GI03001W MYBGI03001W1 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
GI04003N MYBGI04003N5 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
GK04002F MYBGK04002F9 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
CI02014T MYBCI02014T5 SMC 14/2002 23.04.2007 17-Jan-07 100.13 3.62 99.25 4.82 28-Dec-05 0.26 0.14
CI02025A MYBCI02025A1 SMC 25/2002 22.08.2007 17-Jan-07 100.14 3.68 100.05 3.98 04-Oct-02 0.57 0.62
CI03007S MYBCI03007S0 SMC 7/2003 11.04.2008 17-Jan-07 99.67 3.78 99.7 3.73 01-Dec-06 1.18 2.01
CK02006N MYBCK02006N0 SMC 6/2002 26.02.2009 17-Jan-07 101.2 3.82 99.91 4.45 28-Dec-05 1.97 4.99
DN97062W MYBDN97062W6 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
DN97099H MYBDN97099H9 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
DS97120S MYBDS97120S5 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
QK00001W MYBQK00001W8 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
QI03001A MYBQI03001A5 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
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What Is A Bond Pricing Agency
BPAs are new entities and currently only three countries use the BPA framework
Korea
Thailand
Mexico Egypt (in
development) Malaysia
Indonesia (in
development)
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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:
Bond Pricing Agency Malaysia has met and exceeded these requirements, and was appointed
as the first registered Bond Pricing Agency on 18th April 2006
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The Nature of Bond Pricing Business
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Introducing Bond Pricing Agency Malaysia Sdn Bhd
Bond Pricing Agency Malaysia Sdn Bhd (BPAM) was established in 2004
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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
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BPAM Clients
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BPAM Clients
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Pricing Process
BPAM’s Bond Pricing Services
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Pricing Methodology
Bond Pricing Approach – Current Industry Practice and the Assumptions
Model
Approach Hybrid Approach Hybrid Individual Bond
(Mark To
Model)
Hybrid
Approach
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Pricing Methodology
BPAM’s Pricing Methodology – An Overview
Segmentation Cube
Quotations
Individual Bonds
Measuring the
Market Price
Trades Of Risk
Individual Bond
Valuation
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Pricing Process
Price All Bonds
Pricing for un-traded or rarely traded bonds
Obtain a base spread from the past real
transaction data
Track the change of spread over time Y
Estimate the spread of the bond relative to i
changes in the yield curves and other peer group
e
l
d Yield curve(AA)
20bp Spread(AA)
a te Term
onD to M
ati a turit
alu y
Ev
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Pricing Methodology
Bond types identified and priced by BPAM in the MYR market:
Callable Amortizing Bonds with Secondary Notes Callable Stepping Bonds
Discount Bonds Callable Stepping Amortizing Bonds
Bullet Bonds Convertible Stepping Bonds
Fixed Rate Bonds Callable Bonds with Secondary Notes
Amortizing Bonds Convertible Bonds with Secondary Notes
Callable Bonds
Convertible Bonds
Exchange Bonds
Bond with Warrants As of April 2008:
Fixed Rate ABS
Callable ABS Total stocks in the market: 2693
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
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Pricing Methodology
Price All Bonds
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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.
I I I Interest
Payment
P P Principle
I I I I P
Payment
Current market practice is to price option embedded bonds to the first call
Cash flow after first call is discarded
Assumption is flawed
There are also no difference in pricing of American, European and Bermudan option
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Bond Pricing, Current Practice and Pricing Issue
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:
At time T, the non-exercise price can be computed by:
P(T+1;up)
Pnon − exer (T ) = exp(− r × ∆t ) × [ P(T + 1; up ) * prob(up )
+ P (T + 1; mid ) * prob(mid )
+ P (T + 1; dw) * prob(dw)]
P(T) P(T+1;mid)
1) Hull and White suggested a two-stage method to generate the interest rate tree using the basic
formula: dr = [θ (t ) − ar ]dt + σdz
θ (t )
a
: the coefficient of long term mean
: meanσspeed
: the volatility of short term interest rate
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Bond Pricing, Current Practice and Pricing Issue
Theoretical Method in Pricing of Bonds with Embedded Options
7 a 2 j 2 ∆t 2 − 3aj∆t
Pu = +Tree
Example: Pricing of option embedded bonds – One Factor Hull & White Trinomial6 2
1
1) Hull and White suggested a two-stage method to generate the interest rate tree.Pm = − 3 − a j 2 ∆t 2 + 2aj∆t
2
1 a 2 j 2 ∆t 2 − aj∆t
a) The first stage in building a tree for this model is to build a tree for a Pd = +
6 2
r*
variable that is initially zero following
the processdr = −ar dt + σdz
* *
.
1 a 2 j 2 ∆t 2 − aj∆t
Pu = +
6 2
2
Pm = − a 2 j 2 ∆t 2
3
1 a 2 j 2 ∆t 2 + aj∆t
Pd = +
6 2
Assumption:θ (t ) = 0 r (,0) = 0
First Stage Model: dr * = −ar * dt + σdz 1 a 2 j 2 ∆t 2 + aj∆t
Pu = +
∆R * = σ 3∆t t = i∆t R = j∆, R
* 6 2
Parameter Setting: , 1
0.184 0.816 Pm = − − a 2 j 2 ∆t 2 − 2aj∆t
j max
and j min = −, j max
3
: Minimum integer between
a∆t a∆ t 7 a 2 j 2 ∆t 2 + 3aj∆t
Pd = +
6 2
Tree expansion: If the short-term interest reaches the two boundaries
j max j min
or goes down , then the probabilities to up, Pmiddle,
u , Pm , Pd down ( ) will change.
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Bond Pricing, Current Practice and Pricing Issue
Theoretical Method in Pricing of Bonds with Embedded Options
Example: Pricing of option embedded bonds – One Factor Hull & White Trinomial Tree
1) Hull and White suggested a two-stage method to generate the interest rate tree.
r * tree
b) The second stage in the tree construction is to convert the into a tree for r . This is
*
r the nodes on the
accomplished by displacing -tree so that the initial term structure is exactly
i∆t interest rates on r-tree at time
matched. The approach is to set the r * to the
to be equal
α (i∆t )
corresponding interest rates on -tree plus α
while keeping the probabilities the same. The procedure is to calculate s iteratively so
that theα (initial
Define t ) = r (tterm α (t )is= [matched.
) − r * (tstructure
) d θ (t ) − aα (t )]dt
α can be calculated as follows:
0 , 0 = 1( α 0
Qi , j : Present value of security, which gives $1 at (i,j) Qnode ), ∆t = initial -period
interest rate,
Q
given
k
∑ Qterm
i +1, j = by j ) exp[−(α i + k∆R )∆t ]
i , k p ( k ,structure)
p(k , j ) Pu , Pm , Pd
where ln ∑
: transition probability from
− j∆R∆t
Qi , j enode −(i,k)
ln Pi +to
1 node (i+1,j) ( )
Pi +1 = ∑ Qi , j exp[−(α i + j∆R)∆t ] αi = j
j ∆t
where P is the price computed from the current term structure of interest rate
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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 Conventional valuation formula used
structuring
Fixed Payment Bond Fixed Payment Bond Formula
Conventional c 1
n
×F×
100 f F
I I Interest
P=∑ + − Accrued Interest
y 1 ( k −1+ D )
D 2 y 1 ( n −1+ D 2 D )
Payment k =1
(1 + × ) (1 + × )
100 f 100 f
P Principle
I I P
Payment
Notatio Descriptions
fn Payment frequency in a year
c Cash flow rate
F Face amount = Notional
Islamic y Yield
D No. of days in one regular coupon period
SN D2 No. of days between the value date and the next
n payment
Last payment
date period
P Clean Price
SN
Secondary Note in Islamic structure acts as the fixed profit
SN payment as agreed in the contract.
SN Secondary
Note Cash flow rate in Islamic structure derived as the ratio between
PN Primary
the secondary note amount and the primary note amount
PN
Note
Primary amount is the face amount
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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 Many more
unaccounted Islamic
Not an exchange of paper or money but an features in current
exchange of Syariah approved assets market valuation
Rather than relying on the performance of the underlying assets, Islamic bonds
are currently priced as per their conventional counterparts and almost
arbitrarily.
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Bond Pricing, Current Practice and Pricing Issues - Islamic
Example – KL Sentral Sdn Bhd (KLSSB) Musyarakah Venture with Kuwait Finance
House (KFH) as option writer
Market prices KLSSB as a
Investor fixed payment bond to legal
maturity disregarding asset
s issues.
KLSSB Proceeds
Trustee
issues from PU for Truste overseeing the
Sukuk and Sukuk
receives
1 5 redemption
e Musyarakah Bond has pricing issue on asset pricing
proceeds in and profit Cashflow payments in
return payments arrears via aggregated
project revenue
Unconditional and irrevocable
purchase of assets
Musyarakah KLSSB KLSSB Put KFH Forward pricing of assets require a forward rate
partners (as Wakeel to Option benchmark of asset class
appoint
Investors) Consideration must be taken for counterparty
KLSSB as Put
risk at the end of the contract
the Project 4 Option
Agent terms
Purchase Undertaking and Bond has pricing issue on asset’s embedded
(PU) condition option IHH
s
Distributable profit to be Stake of Musyarakah IH
shared semi-annually partners based on their IHL
based on an agreed 3 2 capital contribution of I0
profit sharing ration of
99%:1% to KLSSB and
74:26 from KLSSB (in
kind) and Sukukholders IL
ILH
….
Sukukholders (cash) ILL
Asset volatility and term structure of asset
Musyarakah Venture to sell class.
Project Lands Eg equity industry index volatility
Asset data greatly needed
Optionality of the put/call feature
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Bond Pricing, Current Practice and Pricing Issues - Islamic
In asset pricing, many considerations must be taken in the cash flow structure and
risk exposure
Cash Flow
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THANK YOU
No. 17-8 & 19-8 , The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur, Malaysia
Tel: +603 2772 0888 Fax: +603 2772 0808 Email : enquiries@bpam.com.my
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