Capital Market – Equity & Bond Markets (Topic 4)

Capital Market: Purpose & Scope

• Capital market = marketplace for long-term funding instruments (shares, debentures, bonds, ETFs, sukuk, etc.)
  • Serves individuals, firms, governments
• Covers public & private debt with maturity > 1 yr or no fixed maturity
• Malaysian info hub: https://www.capitalmarketsmalaysia.com/

Core Functions

• Channel surplus funds to deficit units via diverse instruments
• Facilitate risk diversification for investors
• Provide intermediation for corporate fund-raising & ownership changes
• Support macro-economic development & private-sector growth (Malaysian diversification)

Key Security Classes

• Equity Market → trading common & preferred shares
• Bond (Debt) Market → private & gov’t debt securities

Equity (Stock) Market

Stock Types

• Two corporate equity classes:
  • Common stock → discretionary dividends, residual claim, limited liability, voting rights; dividends never accrue if skipped
  • Preferred stock → higher claim on distributions vs. common; hybrid equity/debt features

Authorization & Issuance Cycle

1. Board of Directors + existing shareholders approve share authorization
2. Primary market distribution (IPOs, seasoned offerings) with investment-bank help
3. Post-issuance trading on secondary markets (e.g., Bursa Malaysia)

Primary Market Mechanisms

• Commitment underwriting → bank guarantees price, buys entire issue
• Best-efforts underwriting → bank acts placing agent, no price guarantee
• Syndicate underwriting → group of banks share distribution risk
• Seasoned offerings → additional issuance by listed firm; pre-emptive rights protect existing proportional ownership
  • Rights offerings allow purchase below market, saving underwriting fees

Secondary Market

• Continuous trading among investors; provides liquidity & price discovery

Bursa Malaysia’s Three Listing Boards

Market Institutions & Oversight

• Bursa Malaysia: exchange platform ensuring transparency & efficiency
• Securities Commission (SC) Malaysia: regulator—rules, market development, investor protection

Stock Market Indexes

• Composite value of representative stock baskets → performance barometer
• International examples: NYSE Composite, NASDAQ Composite, Nikkei, etc.
• Malaysia computes 13 indices (Main-market & sector based)
  • Notables: FTSE Bursa Malaysia KLCI (30-largest), Small Cap, EMAS, Hijrah Shariah, FTSE4Good

Index Percentage-Change Example

• Yesterday FBM KLCI = 1500; today = 1550
• $\text{\%\,change}=\frac{1550-1500}{1500}\times100 = 3.33\%$
  • Signals aggregate market-cap gain of top-30 Malaysian companies; drivers may include positive macro news, strong earnings, higher investor confidence

Participants

• Institutional (pension, insurance, mutual funds)
• Retail investors
• Government-linked investment entities
• Foreign investors
• Founders/major shareholders, employees, gov’t agencies

Investor Benefits & Risks

Benefits:

• Capital appreciation, dividends, liquidity, diversification, ownership, limited liability
  Risks:
• Market/systematic, firm-specific, interest-rate, inflation, liquidity, political/regulatory, currency (intl), volatility

Bond (Debt) Market

Bond Essentials

• Long-term debt obligations issued by corporations or governments
• Investor earns fixed/floating/zero coupons; receives par value at maturity
• Instrument varieties: discount, fixed-rate, floating-rate, hybrids, sukuk

Cash-Flow Illustration

1. Issuer sells bonds to investors → receives capital/loan
2. Pays periodic coupons + principal at maturity

• Example: Firm A buys RM 1 m face-value 3 % coupon bond maturing 1 Jan 2050 → receives RM 30 000 p.a. + RM 1 m at maturity

Malaysian Bond Segmentation

1. Government Bonds
   • Malaysia Government Securities (MGS) – conventional
   • Government Investment Issues (GII) – Islamic
   • Treasury Bills (T-bills), Islamic T-bills, BNM Notes (conventional & Islamic)
2. Corporate Bonds
   • Conventional corporate bonds
   • Islamic corporate bonds (Sukuk)
   • Medium-Term Notes (MTN)
   • Quasi-government (Khazanah, Cagamas) & short-term commercial papers

Secondary Trading

• Bonds/sukuk trade OTC or on Bursa Malaysia (retail tranches)
• Proceeds go to seller (vs. issuer in primary)
• MGS dominate secondary liquidity

Regulatory Architecture

• Bank Negara Malaysia (BNM)
• Securities Commission (SC) Malaysia → all issuance approval; initiatives: LOLA (2015), Bond & Sukuk Information Exchange—BIX (2017)

Market Participants

• Institutional (pension, insurance), high-net-worth, retail (since 2018), corporates, governments

Credit Ratings

• Assess issuer’s ability/timing to meet coupon & principal (credit risk only)
• Global agencies: S&P Global, Moody’s, Fitch
• Malaysia: RAM Ratings, MARC
• Scale modifiers:
  • S&P/Fitch: plus (+) / minus (−) within AA–CCC
  • Moody’s: 1, 2, 3 within Aa–Caa
  • RAM: 1, 2, 3 within AA–C; MARC: +/- within AA–B
• Investment Grade vs. Speculative (example Moody’s ladder listed)
  • Aaa → minimal risk; C → default

Anatomy of a Bond Name

• Format: [Issuer] [Issue No./Year] [Coupon %] [Maturity Date]
  • Example 1: “MGS 3/2010 4.498% 15.04.2030”
  • MGS = Malaysian Govt. Securities (issuer: government)
  • 3 / 2010 = 3rd issuance in 2010
  • Coupon = 4.498 % p.a.
  • Maturity = 15 Apr 2030
• Key descriptors:
  1. Coupon rate → $\text{Coupon\,payment}=\text{coupon rate}\times\text{par value}$
  • If par = RM 10 000 & coupon = 3.759 % ⇒ RM 375.90 per year
  1. Maturity date → final redemption date
  2. Issuer type → corporate (Corp) or government (Govt)
  3. Currency denomination → e.g., Ringgit, USD

Bond Valuation Fundamentals

• Present value of expected cash flows discounted at required return (yield-to-maturity, YTM)
  • Sources of cash flow: periodic coupons + face value at maturity
• Time-Value-of-Money (TVM) present value formula: $PV = \sum<em>{t=1}^{n} \frac{CF</em>t}{(1+r)^t}$
  • where $r$ = required return; $n$ = periods
• Semi-annual bond valuation: $V<em>b = \sum</em>{t=1}^{2T} \frac{INT/2}{(1+r<em>b/2)^t} + \frac{M}{(1+r</em>b/2)^{2T}}$
  • $INT$ = annual coupon, $M$ = par, $T$ = years to maturity, $r_b$ = YTM

Price Relationships

• Premium bond: V_b > M when coupon > market YTM
• Discount bond: V_b < M when coupon < market YTM
• Par bond: $V_b = M$ when coupon = YTM

Bond-Investor Risks

• Interest-rate (price) risk, credit/default, inflation purchasing-power, liquidity, reinvestment, currency, market/systematic, sovereign/political

Concept-Check Highlights (Sample Q&A for Revision)

1. Stock represents ownership in a company (True)
2. Bond = instrument that represents a loan (debt), not ownership
3. Non-bond characteristic: ownership of issuing company (belongs to stock)
4. Stockholders are entitled to discretionary dividends, not interest/coupons or maturity date
5. Primary market = issuance of new securities to raise capital
6. Quote “MGS 3/2010 4.498% 15.04.2030” ⇒ redeemable 15 Apr 2030, pays 4.498 % annually
7. Analytical tasks: derive face value, coupon rate, issuance date, size, annual coupon, price reaction to YTM drop, total cash flow at maturity

Practical, Ethical & Strategic Implications

• Efficient capital markets lower cost of capital, fostering national economic growth
• Regulatory bodies safeguard transparency, fair dealing, & investor confidence—ethical bedrock for market integrity
• Credit-rating accuracy affects borrowing costs; conflicts of interest highlight need for oversight & due diligence
• Digital platforms (BIX, Bursa electronic trading) enhance accessibility, supporting retail investor inclusion & financial literacy

Quick-Reference Formulas & Definitions

• % Index change: $\frac{\text{New} - \text{Old}}{\text{Old}}\times100$
• Coupon payment: $\text{Coupon rate}\times\text{Par}$
• Present Value (generic): $PV=\sum<em>{t=1}^{n}\frac{CF</em>t}{(1+r)^t}$
• Bond valuation (semi-annual): $V<em>b=\sum</em>{t=1}^{2T}\frac{INT/2}{(1+r<em>b/2)^t}+\frac{M}{(1+r</em>b/2)^{2T}}$

End of Study Notes – Topic 4