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Sources of financing
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liquidity,risk of bankruptcy
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Recommendations to improve
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sources of financing
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TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION
1.1 Company Profile
9-10
10-14
14-15
15-16
CHAPTER 2: CONTENT
2.1 Sources of Finance
17-20
20-28
28-30
CHAPTER 3: CONCLUSION
31
REFERENCES
32-33
APPENDIX
34-38
39-67
CHAPTER 1: INTRODUCTION
Through its subsidiaries, the local company currently represents some of the biggest
international brands in Malaysia, including commercial vehicle brands Daihatsu and
Hino; passenger car brands Perodua, Volvo, Volkswagen and Mitsubishi; and sports
tuning brands, ABT and Heico Sportiv. The motor trading business of MBMR
includes light trucks to medium and heavy duty trucks and buses in the commercial
vehicle market, and from compact entry level cars to luxury cars in the passenger
vehicle market. On the other hand, MBMR's automotive parts manufacturing division
currently produces steel wheels, assembles wheel modules, builds bodies for
commercial vehicles and manufactures automotive safety equipment such as airbag
modules, seat belts, steering wheels, noise and heat reduction materials and insulator
parts. Meanwhile, MBMR also provides after sales service, body and paint, providing
of spare parts and accessories as well as customer services.
The Companys subsidiaries include Hirotako Holdings Berhad, Oriental
Metal Industries (M) Sdn. Bhd. (OMI), Daihatsu (Malaysia) Sdn. Bhd. and Federal
Auto Holdings Berhad. There are two subsidiary companies of MBMR involves in
property development, which are Inai Benua Sdb. Bhd. and MBMR Properties Sdb.
Bhd. Besides that, MBMR has associates that cooperate with it in daily business, such
as Hino Motors Manufacturing (Malaysia) Sdn Bhd., Hino Motors Sales (Malaysia)
Sdn. Bhd., and Perusahaan Otomobil Kedua Sdn, Bhd. (Perodua).
10
Baru Inn Sdn Bhd, Perusahaan Otomobil Kedua Sdn Bhd, PERODUA Sales Sdn Bhd,
Pembinaan Teknikhas Sdn Bhd, Precisionag Sdn Bhd, Hartamuda Sdn Bhd, Bizworth
Sdn Bhd, Galian Lembah Kinta Sdn Bhd, GMMI Sdn Bhd, MBM Energy Sdn Bhd
and Arah Seraya Sdn Bhd. He serves as member of the Audit Committe of the
Company with effect on January 1, 2011.
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Diagram 1.1: Directors of MBMR
12
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13
also allowed it to leverage on the growing number of cars sold to boost its recurring
income contribution from the lucrative aftersales business. For example, major
investments of MBMR in manufacturing such as the alloy wheel plant in Rawang and
the joint-venture plant with Hino Motors Ltd in Sendayan may contribute to the group
by helping the group to achieve greater financial stability when expansion costs are
fully absorbed.
1 http://www.reuters.com/finance/stocks/overview?symbol=MBMR.KL
2 http://www.bnm.gov.my/index.php?tpl=489&sdate=2014-07-02&lang=
3 file:///C:/Users/Lap/Downloads/FBMKLCI_20140630.pdf
15
The required rate of return from MBM Resourcing Bhd share is 7.0952%. The beta of
MBMR is lower than the market beta of 1. This indicates the company will be less
volatile than the market. As the total market return will be as high as 14% while the
required return of the shareholders will only be 7.0952%. The stock is considers
undervalued in the SML as we can gain higher return with same risk apply.
16
CHAPTER 2: CONTENT
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MBMR issue rights share and warrant as a way of raising new share capital.
The warrant issued by MBMR will entitled the holder of the warrants to subscribe for
a new ordinary share in the company. It can be exercised at any time within a period
of 5 years commencing from the date of issue of the warrants which is 21 June 2012
but the holders of the warrants will not be entitled to any voting rights or to participate
in any distribution and/or offer of further securities in the company. MBMR have
issued 73,165,836 right issue warrants together with listing and quotation for the
73,165,836 right shares on the Main Market of Bursa Malaysia and there are 73,300
warrants have been exercised at the fixed price of RM3.20 (refer to appendix
5).Lastly, the warrants shall be transferable in the manner provided under the
Securities Industry Act, 1991 and the rules of Bursa Malaysia Depository Sdn. Bhd.5
the fixed asset such as company vehicles, plant and machinery, office equipment and
farming machinery. The present value of hire purchase payables is RM40,000 which
RM17,000 will be due within one year while another RM23,000 will be due in the
second to fifth years inclusive. The effective interest rates for 31 December 2012
ranges from 6.54% to 7.1% per annum. Interest rates are fixed at the inception of the
hire purchase arrangements (Refer to appendix 8). 7
Year
Year
Year
Year
2013
2012
2011
2010
2009
RM
RM
RM
RM
RM
500,000,000
500,000,000
500,000,00
500,000,00
500,000,00
390,637,000
242,943,000
242,677,00
242,073,00
242,073,00
73,165,000
73,166,000
74,000
2,000
1,361,000
266,000
604,000
Authorized
:
Ordinary
share of
RM1 each
Issued and
fully paid
as 1
January
Bonus
share
Right issue
with
warrants
Exercise of
warrants
Exercise of
ESOS
Issued and
fully paid
242,943,00
242,677,00
242,073,00
257,057,00
257,323,00
257,927,00
390,637,000
242,943,00
242,677,00
242,073,00
3.21 =
x 3.21 =
0 x 3.18 =
0 x 3.34 =
0 x 2.59 =
1,254,1825,31
1,253,944,77
772,558,74
810,541,18
626,969,07
390,711,000
390,637,000
109,289,000
109,363,000
390,711,000 x
Market
value
as 31 dec
Unpaid
share
capital
0
0
Table2.1 Share Capital
RM
PERCENTAGE %
390,637,000
100=78.1274
500,000,000
390,637,000
Exercise of warrants
74,000
74,000
100=0.0148
500,000,000
109,289,000
109,289,000
100=21.8578
500,000,000
21
2.2.2 Debt
Term Loan
Banker Acceptance
Revolving Credits
Bank Overdraft
Bank Overdraft;
0%
Revolving
Credits; 5%
Banker Acceptance; 18%
RM000
Long Term
478,186
%
365,937
100=76.5261
478,186
86,501
86,501
100=18.0894
478,186
Revolving Credits
25,000
25,000
100=5.2281
478,186
Bank Overdraft
748
748
100=0.1564
478,186
Banker Acceptance
Short Term
PERCENTAGE
22
Something between 25% - 50% would be considered normal for a wellestablished business which is happy to finance its activities using debt.
Year
2009
18,481,000
242,073,000 x 2.59
= 0.029 = 2.9%
2010
21,199,000
242,677,000 x 3.34
= 0.026 = 2.6%
2011
332,845,000
242,943,000 x 3.18
= 0.43 = 43%
2012
316,521,000
390,637,000 x 3.21
= 0.25 = 25%
2013
321,344,000
390,711,000 x 3.210
= 0.26 = 26%
23
formula 2.2
Year
2009
18,481,000
18,481,000+626,969,070
= 0.028 = 2.8%
2010
21,199,000
21,199,000+ 810,541,180
= 0.025 = 2.5%
2011
332,845,000
332,845,000+772,558,740
= 0.30 = 30%
2012
316,521,000
316,521,000+1,253,944,770
= 0.20 = 20%
2013
321,344,000
321,344,000+1,254,182,310
= 0.20 = 20%
2010
2011
2012
2013
The gearing ratio is the proportion of a company's debt to its equity. The
gearing ratio is also concerned with liquidity. In theory, higher the gearing ratio means
higher the risk of the business. The graph is show about the debt to equity ratio and
debt to capital ratio from the year of 2009 to year of 2013. Both ratio are move in the
same direction. From the year 2009 to 2010, there is slightly decrease in the debt to
equity ratio from 2.9% to 2.6%, which is a good sign for the MBM resource.
However, the debt to equity is highly increase from the year 2010 to 2011, which are
2.6% to 43%, which mean the MBM resource is borrowing more long term loan to
finance their business in that year and it will indicate MBM resource facing the high
risk than the previous year. In year 2012, the debt to equity ratio has decrease from
43% to 25% due to MBM resource has increasing their share capital by issuing bonus
share to their shareholder. In year 2013, there has increase slightly from 25% to 26%,
it a quite good for MBM resource because not much change in the debt to equity ratio
and may be they have indicate a conservative financial management.
Graph 2.1 shows the debt to equity ratio which measure a companys financial
leverage. The debt-to-capital ratio gives us an idea of a company's financial structure,
or how it is financing its operations, along with some insight into its financial
strength. In year the year of 2009 and 2010, the debt to capital ratio remains very low
which are 2.8% and 2.5% respectively but in the year of 2011, the ratio increases
sharply to 30%. In this year, MBM Resources Berhad (MBMR) was investing RM250
million in capital expenditure over the next five years in an aggressive expansion plan
to transform the group into one of the key automotive players in Malaysia and the
region.
The non-equity capital expenditure will primarily be utilised to expand its
manufacturing infrastructure, enhance its nationwide retail and service network, and
realise the value of its prime assets. In line with its aspiration of becoming a complete
automotive group, MBMR is investing in new manufacturing facilities to cater for
product line extensions and equip itself with vehicle assembly capabilities. It is also
enhancing its substantial motor retail and service network across the country with new
3S and one-stop body and paint centres to cater to the needs of its growing customer
25
base.8 (Refer to appendix 9). This is why the debt to capital ratio is so high in year
2011 as MBMR was using non equity capital expenditure to expand their business. In
year 2012 and 2013, the debt to capital ratio is 20% for both years dropping from 30%
in year 2011. This has proved the sudden increase of debt to capital ratio in year 2011
was because of expansion of its businesses.
2.2.4 Liquidity Ratio
Current ratio =
Year
Current ratio
2009
398,479,000
102,361,000
= 3.89
2010
529,163,000
359,705,000
= 1.47
2011
764,442,000
372,817,000
= 2.05
2012
1,020,234,000
573,035,000
2013
968,996,000
461,651,000
= 1.7
= 2.09
8 http://www.mbmr.com.my/Detail/News-and-Media/PressReleases/RM250-Million-Expansion-Plan-To-Transform-MBM-ResourcesBerhad-Into-Major-Automotive-Group/
26
Quick ratio =
Year
2009
(398,479,00013,393,600)
102,361,000
2010
(529,163,000199,032,000)
359,705,000
= 0.91
2011
(764,442,000 261,687,000)
372,817,000
= 1.34
2012
(1,020,234,000 393,693,000)
573,035,000
2013
(968,996,000 282,439,000)
461,651,000
= 2.58
= 1.09
= 1.48
4.5
3.89
4
3.5
3
2.5
2.58
2
1.5
1.7
1.47
1.34
1
0.91
0.5
0
2009
2.09
2.05
2010
2011
current ratio
quick ratio
1.48
1.09
2012
2013
because almost all ratios are at healthy ratio. In general, the healthy rate for current
ratio is 2 and the quick ratio is 1. So for the year of 2009, 2011 and 2013 of the
current ratios are healthy which the ratios are higher than 2 which are 3.89, 2.05 and
2.09 respectively. For the quick ratio, only year 2010 is not at the healthy ratio, other
years are consider have a healthy quick ratio.
In year 2009, the current ratio is the highest which is 3.89 compare to other
year current ratio. However, high current ratio may not always is a good signal.
Because a company with high current ratio will unable to pay its current liabilities if a
large portion of its current assets consists of slow moving or obsolete inventories.
From year 2010 to 2013, the current ratio move up and down which are 1.47,
2.05, 1.7 and 2.09 respectively. It show that for year 2010 and 2012, MBM recourse is
tend to less liquidity and maybe is they increasing in the short-term debt, and there are
no much increase in current asset. For year 2011 and 2012, MBM resource is more
liquidity and able to meet the short term debt repayment.
For the quick ratio, the movement is same as the current ratio. There is a rapid
decline from year 2009 to 2010 and rise and fall from year 2010 to 2013. Based on the
quick ratio, the lowest quick ratio is 0.91 which mean MBM resource short term
liability are more than current asset which is the most liquid assets that easily convert
to cash. On the other hand, with a low quick ratio may have fast moving inventory.
Overall of the quick ratio, it show that MBM resource has ability to pay short term
debts immediately because their average quick ratio is above 1 and they have a strong
liquidity position However, higher quick ratio does not mean that a company has a
strong liquidity position because a company may have high quick ratio but slow
paying debtors.
money to be earned from future operations. In some cases, the company's physical
assets may be used as collateral for bonds. The reason why Issuing bond is more
popular than issuing to stock in Malaysia is because interest on bonds and other debt
is deductible on the corporation's income tax return but the dividends on stock are not
deductible on the income tax return. A second advantage of financing assets with
bonds instead of stock is that the ownership interest in the corporation will not be
diluted by adding more owners. Bondholders and other lenders are not owners of the
assets or of the corporation. Therefore, all of the gain in the value of the assets
belongs to the stockholders. The bondholders will receive only the agreed upon
interest. This is related to the concept of leverage or trading on equity. By issuing
debt, the corporation gets to control a large asset by using other people's money
instead of its own. If the asset ends up being very profitable, all of its earnings minus
the interest will enhance the owners' financial position. In addition, the debt to equity
ratio is 26% (calculated in gearing ratio) which consider low debt company.
Therefore, it is better to issue bond compared to other debt financing and shares.
Moreover, bond has a lot of feature such as convertible and callable bond. Convertible
bond is one where the holder can convert the bond into common stock at a future time
while the callable bond is one where the issuing company is likely to retire the bonds
before maturity if the bonds are paying 9% interest while the market rate of interest is
6%.
2.3.2 Factoring
Other than bond, factoring is another source of financing MBMR should use.
Factoring is a financial transaction in which a business sells its accounts receivable
(i.e., invoices) to a third party (called a factor) at a discount. Factoring is a good short
term financing tool as it gets cash quickly and don't have to collect the debt. However,
you lose some of the value of the invoice. The factoring company gets the debt and
has to collect it. They make a profit by paying you less cash than the face value of the
invoice. Factoring can be used to get money quickly, avoid the hassle of collecting
bad debt, smooth your cash flow and borrow money, secured by your debt.
2.3.3 Retained Earnings
29
MBMR consider a stable company which paid out dividend twice every year.
This shows that MBMR choose to pay out dividend with most of its retained earnings.
We suggest that MBMR should used retained earnings as their internal source of
financing. The amount of earnings retained within the business has a direct impact on
the amount of dividends. Profit re-invested as retained earnings is profit that could
have been paid as a dividend. The major reason for using retained earnings is to
finance new investments, rather than to pay higher dividends and then raise new
equity for the new investments. The management of many companies believes that
retained earnings are funds which do not cost anything, although this is not true.
However, it is true that the use of retained earnings as a source of funds does not lead
to a payment of cash. Besides, the dividend policy of the company is in practice
determined by the directors. From their standpoint, retained earnings are an attractive
source of finance because investment projects can be undertaken without involving
either the shareholders or any outsiders. In addition, the use of retained earnings as
opposed to new shares or debentures avoids issue costs and the use of retained
earnings avoids the possibility of a change in control resulting from an issue of new
shares.
Another factor that may be of importance is the financial and taxation position
of the company's shareholders. If, for example, because of taxation considerations,
they would rather make a capital profit (which will only be taxed when shares are
sold) than receive current income, thus finance through retained earnings would be
preferred to other methods. However, a company must sometimes restrict its selffinancing through retained profits because shareholders should be paid a reasonable
dividend, in line with realistic expectations, even if the directors would rather keep
the funds for re-investing. At the same time, a company that is looking for extra funds
will not be expected by investors such as banks to pay neither generous dividends, nor
over-generous salaries to owner-directors.
30
CHAPTER 3: CONCLUSION
MBM Resources BHD (MBMR 5983) is a company under trading and service
industry in Bursa Malaysia. The company was publicly listed in 1994 and has grown
over the years by leaps and bounds. The core business of MBMR lies in the
automotive industry. With its subsidiaries and associates, MBMR is able to be a
leading dealer in the industry.The two core businesses of MBMR are automotive
distribution and retailing; and automotive parts manufacturing. MBMR also
diversified its investment in property development. Brands under MBMR included
Perodua, Daihatsu, Hino, Volvo, Volkswagen and Mitsubishi. The Chairman of
MBMR is Y. Bhg. Dato Abdul Rahim while the managing director is Mr. Looi Kok
Loon. Both of them play important roles in the development and success of MBMR.
The marketing strategies used by MBMR included multi-brand strategy which helps
MBMR to saturate the market, and also a diverse network of products and services
that enables MBMR to be the most complete automotive groups in Malaysia. The
current stock price for MBM Resources Bhd is RM 3.060, beta of MBMR is 0.37
from reuters, risk-free rate is 3.04% based on 3 month Malaysia Treasury Bill and the
market return is 14% based on the year to year total return performance of FTSE
Bursa Malaysia KLCI. MBMR has used several sources of finance to carry out its
business. The first source is equity financing. Under equity financing, MBMR issued
ordinary shares, right issues and warrant to raise capital. The second source is debt
financing. The long term debt financing used by MBMR are term loan and bank
overdraft while short term financing used are bankers acceptance and revolving
credits. The third source of financing is hired purchase.
31
REFERENCES
BNM Government Securities Yield. 2014. BNM Government Securities Yield.
[ONLINE] Available at: http://www.bnm.gov.my/index.php?tpl=489&sdate=2014-0702&lang=. [Accessed 20 June 2014].
Futures Definition | Investopedia. 2014. Futures Definition | Investopedia. [ONLINE]
Available at: http://www.investopedia.com/terms/f/futures.asp. [Accessed 20 June
2014
Malaysian Bonds Market Information, Malaysia Bonds, Islamic Bonds, Ringgit
Bonds, Asian Bonds, Bond Info Hub. 2014. Malaysian Bonds Market Information,
Malaysia Bonds, Islamic Bonds, Ringgit Bonds, Asian Bonds,Bond Info Hub.
[ONLINE]
Available
at:http://bondinfo.bnm.gov.my/portal/server.pt?
open=514&objID=27280&parentname=CommunityPage&parentid=1&mode=2&in_
hi_userid=22874&cached=true. [Accessed 20 June 2014]
MBM Resource Berhad :: Share Capital. 2014. MBM Resource Berhad :: Share
Capital.
[ONLINE]
Available
Quote|
Reuters.com.
[ONLINE]
at:http://www.reuters.com/finance/stocks/overview?symbol=MBMR.KL.
Available
[Accessed
20 June 2014].
Options Defined - NASDAQ.com. 2014. Options Defined - NASDAQ.com.
[ONLINE] Available at: http://www.nasdaq.com/investing/options-guide/definitionof-options.aspx. [Accessed 20 June 2014].
Primary vs. Secondary Market. 2014. Primary vs. Secondary Market. [ONLINE]
Available
at: http://finance.mapsofworld.com/capital-market/primary-vs-
What is U.S. Treasury Bond? definition and meaning. 2014. What is U.S. Treasury
Bond?
definition
and
meaning.
[ONLINE]
Available
33
APPENDIX
Appendix 1(Beta of MBMR)
Sources: Reuters
34
Sources: BNM
Sources: FTSE
35
36
37
Appendix 8
38
39
13WBR11861
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Development of markets
Products offered
25
13WBR10039
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Development of markets
Products offered
25
13WBR12255
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Development of markets
Products offered
YONG QI ONN
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13WBR10443
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Development of markets
Products offered
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40
41
significant market segments were successfully nurtured for private debt securities and
investment management, coupled with the development of a comprehensive and
innovative Islamic capital market (ICM). Today, these market segments rank among
the leading centres in the region, broadening the Malaysian capital market landscape
and complementing a well-established stock market which provides equity financing
to almost one thousand PLCs and which has functioned as a growth platform for
many small and mid-cap companies.
42
The secondary market is that part of the capital market that deals with the
securities that are already issued in the primary market. The investors who purchase
the newly issued securities in the primary market sell them in the secondary market.
The secondary market needs to be transparent and highly liquid in nature as it deals
with the already issued securities. In the secondary market, the value of a particular
stock also varies from that of the face value. The resale value of the securities in the
secondary market is dependant on the fluctuating interest rates.
Chapter 2 Development of Financial Market in Malaysia
The Financial Market mainly comprises:
i) The Money and Foreign Exchange markets, and
ii) The Capital and Derivatives Markets
The Malaysia financial market is governed and regulated by the Bursa
Malaysia or the Malaysia stock exchange (MYX). Earlier known as Kuala Lumpur
Stock Exchange, MYX is the barometer of Malaysia financial market. The various
financial institutions are involved in the financial markets.
2.1 Derivatives Market
The derivatives market is for trading instruments that provide contingent
claims on underlying assets, and whose values depend on the price of the underlying
assets or securities. Bursa Malaysia Derivatives (BMD), formerly known as Malaysia
Derivatives Exchange (MDEX), came into inception on 11 June 2001 with the merger
of the Kuala Lumpur Options and Financial Futures Exchange of Malaysia
(KLOFFE) and the Commodity and Monetary Exchange of Malaysia (COMMEX
Malaysia). The name MDEX was changed to Bursa Malaysia Derivatives Berhad in
April 2004.
43
funds. At the same time, it also provides short-term investment opportunities and
outlets for those with temporary surplus funds. An efficient money market is an
intermediary not only for financial institutions but also for firms and non-bank
investors to invest their surplus funds. Money market operations comprise two broad
categories: placement of short-term funds, and purchase and sale of short-term money
market instruments (such as bankers acceptances, negotiable instruments of deposit,
Treasury bills, Cagamas notes, etc.). The interbank players in the money market are
the commercial banks and investment banks.
Chapter 3 Financial Products
Chapter 3.1 Bond
3.1.1 Japanese Government Bond (JGB)
A bond issued by the government of Japan. The government pays interest on the bond
until the maturity date. At the maturity date, the full price of the bond is returned to
the bondholder. Japanese government bonds play a key role in the financial securities
market in Japan.
There are other bond like Samurai bond which is a yen-denominated bond issued in
Tokyo by a non-Japanese company and subject to Japanese regulations. Other types of
yen-denominated bonds are Euroyens issued in countries other than Japan.
3.1.2 Bank of Thailand Bonds (BOT Bonds)
Bank of Thailand bonds are debt securities issued by the Bank of Thailand and used
primarily for conducting monetary policy, managing liquidity and interest rate in
financial market in order to stabilize economic growth and setting benchmark interest
rate that helps enhance corporate debt market development.
3.1.3 US Treasury Bond
A negotiable, coupon-bearing debt obligation issued by the U.S. government and
backed by its full faith and credit, having a maturity of more than 7 years. Interest is
paid semi-annually. U.S. Treasury Bonds are exempt from state and local taxes. These
securities have the longest maturity of any bond issued by the U.S. Treasury, from 10
to 30 years. The 30-year bond is also called the "long bond." Denominations range
45
from $1000 to $1 million. U.S. Treasury Bonds pay interest every 6 months at a fixed
coupon rate. These bonds are not callable, but some older U.S. Treasury Bonds
available on the secondary market are callable within five years of the maturity date.
3.1.4 Sukuk
Sukuk is an Islamic financial certificate, similar to a bond in Western finance, that
complies with Sharia, Islamic religious law. Because the traditional Western interest
paying bond structure is not permissible, the issuer of a sukuk sells an investor group
the certificate, who then rents it back to the issuer for a predetermined rental fee. The
issuer also makes a contractual promise to buy back the bonds at a future date at par
value.
3.1.5 Malaysian Government Securities (MGS)
MGS is a long-term interest-bearing bonds issued by the Government of Malaysia to
raise funds from the domestic capital market for development expenditure.
3.1.6 Malaysia Treasury Bills (MTB)
It is a short-term securities issued by the Government of Malaysia for working capital.
3.1.7 Government Investment Issues (GII) and Malaysian Islamic Treasury Bills
(MITB)
GII and MITB is a long-term and short-term non interest-bearing Government
securities, which are issued based on Islamic principles by the Government of
Malaysia.
A financial contract obligating the buyer to purchase an asset (or the seller to sell an
asset), such as a physical commodity or a financial instrument, at a predetermined
future date and price. Futures contracts detail the quality and quantity of the
underlying asset; they are standardized to facilitate trading on a futures exchange.
47
References
Futures Definition | Investopedia. 2014. Futures Definition | Investopedia. [ONLINE]
Available at: http://www.investopedia.com/terms/f/futures.asp. [Accessed 20 June
2014
Available
at:http://bondinfo.bnm.gov.my/portal/server.pt?
open=514&objID=27280&parentname=CommunityPage&parentid=1&mode=2&in_
hi_userid=22874&cached=true. [Accessed 20 June 2014]
Primary vs. Secondary Market. 2014. Primary vs. Secondary Market. [ONLINE]
Available
at: http://finance.mapsofworld.com/capital-market/primary-vs-
What is U.S. Treasury Bond? definition and meaning. 2014. What is U.S. Treasury
Bond?
definition
and
meaning.
[ONLINE]
Available
The capital market refers to markets for medium- to long-term financial assets.
For our purposes the capital market encompasses corporate stocks, public and private
debt securities with maturity exceeding one year, and shares with no fixed maturity
period which are traded in the stock market, the government bond market, and the
market for private debt securities. Government securities through issues of Malaysian
Government Securities (MGS) account for the bulk of the funds raised by the public
sector. Private debt securities (PDS) are the main source of capital market funding for
the private sector, with the equity market also providing a sizeable portion through
rights issues and initial public offerings (IP0s). The domestic currency (ringgit) bond
market has expanded since the financial crisis, supplying some RM34.4 billion in
2000, about 85 percent, of the total net funds raised (Table 1). Low interest rates,
financing for expansion, and corporate debt restructuring all contributed to the
increase in public and private debt securities. The total value of outstanding bonds
reached RM242 billion in 2000 compared to RM202.5 billion in 1999, with PDS
comprising 58 percent of outstanding bonds in 2000.
The variety of capital market products and services as well as fund-raising
capacity expanded significantly, particularly during the 1990s. Up to the late 1980s
the government's funding needs dominated fund-raising in the capital market. As
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During the past 10 years, stock market capitalisation grew by 11% annually to
triple in size from RM444.4 billion in 2000 to RM1.3 trillion in 2010. The exchange
landscape was transformed with the consolidation of exchanges and clearing houses.
This was followed by the demutualisation and listing of the exchange. Transaction
50
costs were substantially reduced while market infrastructure was upgraded with new
trading platforms and a shortening in the settlement cycle to T+3 in line with
international benchmarks.
The consolidation of stockbrokers also increased the soundness of capital
market intermediaries and strengthened competitiveness; with some stock broking
firms evolving into investment banks.
Primary Market
The primary markets deal with the trading of newly issued securities. The
corporations, governments and companies issue securities like stocks and bonds when
they need to raise capital. The investors can purchase the stocks or bonds issued by
the companies.
Money thus earned from the selling of securities goes directly to the issuing
company. The primary markets are also called New Issue Market (NIM). Initial Public
Offering is a typical method of issuing security in the primary market. The
functioning of the primary market is crucial for both the capital market and economy
as it is the place where the capital formation takes place.
Secondary Market
The secondary market is that part of the capital market that deals with the securities
that are already issued in the primary market. The investors who purchase the newly
issued securities in the primary market sell them in the secondary market. The
secondary market needs to be transparent and highly liquid in nature as it deals with
the already issued securities. In the secondary market, the value of a particular stock
also varies from that of the face value. The resale value of the securities in the
secondary market is dependant on the fluctuating interest rates.
51
Money Market
The money market is an avenue for channelling short-term funds with maturities
typically varying from overnight to those not exceeding 12 months. It provides a
ready source of funds for market participants facing temporary shortfalls in funds. At
the same time, it also provides short-term investment opportunities and outlets for
those with temporary surplus funds. An efficient money market is an intermediary not
only for financial institutions but also for firms and non-bank investors to invest their
surplus funds. Money market operations comprise two broad categories: placement of
short-term funds, and purchase and sale of short-term money market instruments
(such as bankers acceptances, negotiable instruments of deposit, Treasury bills,
Cagamas notes, etc.). The interbank players in the money market are the commercial
banks and investment banks.
fluctuations. Traders and investors could also take a speculative position on the
exchange rate movement, with a view to make profits if they read the trend movement
correctly in their favour.
Derivatives Market
The derivatives market is for trading instruments that provide contingent claims on
underlying assets, and whose values depend on the price of the underlying assets or
securities. Bursa Malaysia Derivatives (BMD), formerly known as Malaysia
Derivatives Exchange (MDEX), came into inception on 11 June 2001 with the merger
of the Kuala Lumpur Options and Financial Futures Exchange of Malaysia
(KLOFFE) and the Commodity and Monetary Exchange of Malaysia (COMMEX
Malaysia). The name MDEX was changed to Bursa Malaysia Derivatives Berhad in
April 2004.
Bond Market
The bond market is the market through which both the private and public sectors can
raise funds by issuing private debt securities and Government securities (such as
Treasury bills and Government bonds) respectively. Issuance of Malaysian
Government Securities is becoming significant as the government sourced the bulk of
its financing requirements from the domestic market. The bond market has become
increasingly popular, as many companies issue private debt securities as an alternative
means for fund raising.
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Financial Products
Sukuk
Sukuk is an Islamic financial certificate, similar to a bond in Western finance, that
complies with Sharia, Islamic religious law. Because the traditional Western interest
paying bond structure is not permissible, the issuer of a sukuk sells an investor group
the certificate, who then rents it back to the issuer for a predetermined rental fee. The
issuer also makes a contractual promise to buy back the bonds at a future date at par
value.
US Treasury Bond
A negotiable, coupon-bearing debt obligation issued by the U.S. government and
backed by its full faith and credit, having a maturity of more than 7 years. Interest is
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paid semi-annually. U.S. Treasury Bonds are exempt from state and local taxes. These
securities have the longest maturity of any bond issued by the U.S. Treasury, from 10
to 30 years. The 30-year bond is also called the "long bond." Denominations range
from $1000 to $1 million. U.S. Treasury Bonds pay interest every 6 months at a fixed
coupon rate. These bonds are not callable, but some older U.S. Treasury Bonds
available on the secondary market are callable within five years of the maturity date.
Options
Options are contracts through which a seller gives a buyer the right, but not the
obligation, to buy or sell a specified number of shares at a predetermined price within
a set time period.
Futures
A financial contract obligating the buyer to purchase an asset (or the seller to sell an
asset), such as a physical commodity or a financial instrument, at a predetermined
future date and price. Futures contracts detail the quality and quantity of the
underlying asset; they are standardized to facilitate trading on a futures exchange.
55
financial market in order to stabilize economic growth and setting benchmark interest
rate that helps enhance corporate debt market development.
56
References
Futures Definition | Investopedia. 2014. Futures Definition | Investopedia. [ONLINE]
Available at: http://www.investopedia.com/terms/f/futures.asp. [Accessed 20 June
2014
Available
at:http://bondinfo.bnm.gov.my/portal/server.pt?
open=514&objID=27280&parentname=CommunityPage&parentid=1&mode=2&in_
hi_userid=22874&cached=true. [Accessed 20 June 2014]
Primary vs. Secondary Market. 2014. Primary vs. Secondary Market. [ONLINE]
Available
at: http://finance.mapsofworld.com/capital-market/primary-vs-
What is U.S. Treasury Bond? definition and meaning. 2014. What is U.S. Treasury
Bond?
definition
and
meaning.
[ONLINE]
Available
Write a report on the development of the capital / financial markets in Malaysia and
how with this developments more financial products could be used by Malaysian
companies to finance operations, expand locally and in the international markets and
how it changes their choice of financing.
(1,000 words)
Capital market has grown along with the economy of Malaysia. Malaysia's
capital market expanded by 10.5% to RM2.7 trillion in 2013, underpinned by steady
growth in key markets and is considered as one of the highly developed market in the
region. Capital markets are financial markets for the buying and selling of longterm debt orequity-backed securities. These markets channel funds from surplus units
such as companies or governments making long-term investments to deficits units.
Capital market consists of primary market and secondary market. In primary
market, new stock or bond issues are sold via processes called underwriting. The main
entities seeking to raise long-term funds on the primary capital markets are
governments (which may be municipal, local or national) and business enterprises
(companies). Governments tend to issue only bonds, whereas companies often issue
either equity or bonds. In secondary market, previously issued financial
instruments such as stock, bonds,options, and futures are bought and sold to meet
investors needs.
There are various type of financial instruments in the financial market,
however for source of financing, there are mainly two types of financial instruments,
which are debt financing and equity financing. Debt financing involves borrowing
money, typically in the form of a loan from a bank or other financial institution or
from commercial finance companies. Equity financing involves bringing in investors
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underlying asset and varies with this asset's price. Such financial instruments may be
used to gain exposure to a given asset or to hedge the risk of this exposure.
Examples of derivatives include futures. A futures contract requires delivery of
an underlying asset at a specified date and according to specific terms. Quantities,
delivery dates and payment terms are standardized in futures contracts. The
underlying asset is delivered at the agreed price at the end of the contract. Another
example would be options. The buyer of an option acquires the right to purchase from
(call option) or sell to (put option) the option seller a given amount of an underlying
asset at a predetermined price, or to receive the difference between the option exercise
price and the underlying price, either at a specified date (in the case of a European
option) or any time before the option expires, in the case of an American option.
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This is a market where firm issuenew securities on an exchange to the public for the
first time. The process of selling new issues to investors is called underwriting. In the
case of a new stock issue, this sale is an initial public offering (IPO).
Companies, governments and other groups obtain financing through debt or equity
based securities. Primary markets are facilitated by underwriting groups, which
consist of investment banks that will set a beginning price range for a given security
and then oversee its sale directly to investors. This also known as "new issue market"
(NIM).The function of the primary market is crucial for both the capital market and
economy as it is the place where the capital formation takes places.
Secondary market
The secondary market is that part of the capital market that deals with the securities
that are already issued in the primary market.
The investors who purchase the newly issued securities in the primary market sell
them in the secondary market. The secondary market needs to be transparent and
highly liquid in nature as it deals with the already issued securities. In the secondary
market, the value of a particular stock also varies from that of the face value.
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Foreign exchange market is the market for foreign currency transactions against
ringgit or against other foreign currencies. Trading in the foreign exchange market can
be taken in the spot and futures markets. When foreign currency transactions, must be
delivered immediately, the foreign exchange market is called the spot market. On the
other hand, if you are trading foreign exchange is a future delivery date; the market is
called the forward market. Forward market allows traders and investors to hedge
against foreign exchange risks, namely a way to reduce the risk of exchange rate
fluctuations.
Bond Market
Bond market is issued by private bonds and government securities market to raise
funds through private and public sectors. Malaysian government securities issuance is
becoming significant as the bulk of the financing needs of the government
procurement from the domestic market. The bond market has become increasingly
popular because many private companies issue bonds as an alternative means of
raising capital.
Equity Market
The short-term money market funds, the equity market is to raise long-term funds.
Development of the equity market in favour of society, because it offers more
channels for borrowers, especially the medium-and long-term financing. The equity
market provides a channel for enterprises through issuing stocks and shares, with the
main or second board market in Malaysia stock exchange listing to raise funds.
Derivatives Market
Derivatives market for the provision of the related assets or contingent claims trading
tools, and its value depends on the price of the underlying assets or securities. The
main use of derivatives is to hedge against fluctuations in trading or price of the
underlying assets, although it is possible to use derivatives speculative capital gains.
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Financial product
Malaysian Government Securities (MGS)
Malaysian Government Securities (MGS) is long-term interest-bearing bonds issued
by the Government of Malaysia to raise funds from the domestic capital market for
development expenditure.
Malaysian Treasury Bills (MTB)
Malaysian Treasury Bills (MTB) is short-term securities issued by the Government of
Malaysia for working capital.
Government Investment Issues (GII) and Malaysian Islamic Treasury Bills
(MITB)
Government Investment Issues (GII) and Malaysian Islamic Treasury Bills (MITB) is
long-term and short-term non- interest-bearing Government securities, which are
issued based on Islamic principles by the Government of Malaysia.
Bankers Acceptance
Through a short-term debt instruments issued by commercial bank guarantee line.
Bankers' acceptances issued by the company are part of a commercial transaction.
These instruments are similar to the Treasury bills often usedin money market funds.
Bank acceptances are traded at the nominal value of the discount in the secondary
market, which may be an advantage because bankers' acceptance does not need to
hold to maturity transactions. Bank acceptances are financial instruments often used
in international trade.
Eurobond
Issued by international syndicate, and according to which the classification of the euro
currency denominated bonds. In dollar-denominated and issued by an Australian
company Eurodollar bonds in Japan will be an example of euro bonds. In this
example, the Australian company could issue Eurodollar bonds in any country other
than the United States
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Sukuk
An Islamic financial certificate similar to Western financial bonds that in line with
Shariah, Islamic religious law. The payment bond structure of traditional Western
interests is not allowed, Islamic bond issuers to sell an investor group the certificate,
who then leased back to the issuer for a predetermined rental fee. Issuers also make
contract commitments to buy back bonds at par future date.
Forward contract
A tailor made agreement between two parties to purchase or sell an asset at a
predetermined price on a specified future date. A forward contract can be fulfilled
either by cash settlement or delivery.
Future contract
A contractual agreement, generally make on the trading on futures exchange, to buy
or sell a particular commodity or financial instrument at a predetermined price in the
futures. Futures contracts detail the quality and quantity of the underlying asset.
Swap
A swap is an agreement between two parties to exchange cash flows over time
sequence. Under normal circumstances, when the contract began, at least one of these
series is random or uncertain variables, such as interest rates, exchange rates, stock
prices and commodity prices to determine the cash flow.
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Reference
http://www.sc.com.my/wp-content/uploads/eng/html/cmp2/cmp2_final.pdf
http://www.tradechakra.com/economy/malaysia/capital-market-in-malaysia-167.php
http://www.ibbm.org.my/pdf/CIAFIN%20Oct%2008%20Chap%201.pdf
http://www.kpmg.com.my/kpmg/publications/tax/I_M/Chapter5.pdf
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