VALUATION OF BONDS AND SUKUK - BOND RETURNS (PT1)
Before buying any bond, the investor will need to analyse if the risk versus return relationship of the bond suits his/her own risk appetite and investment horizon.
Therefore, consider:
- Bond Valuation
- Bond Returns/Yields
- Bond Risks
Bond Valuation
- Bond prices are expressed per MYR 100 nominal, e.g. MYR 101.25
- For retail bonds, they are quoted inclusive of accrued interest (also known as the dirty price)
- Accrued interest is paid to compensate the seller for the period during which bond has been held but for which they received no coupon payment
Bond Returns / Yields
- Yield is the most important factor to decide if a bond is worth buying or selling. The investor needs to decide if the yield offered by the bond is attractive to him
- In simple terms, yield is the return generated by investment in particular bond relative to its price. It is important to remember that Coupon/Profit rate and Yield are not the same thing
- There is an inverse relationship between price and yield:
- Price goes up, Yield goes down
- Price goes down, Yield goes up
- Always decide to buy or sell a bond based on its yield NOT its coupon rate or price. As bonds are quoted based on price, the investor must perform a price/yield conversion before deciding if the bond is worth buying. Use the clean price for the conversion.
