Assignment on

World bond market vs

Bangladesh bond market
Course Code: Fin: 513 Course
Title: Fixed income securities

Submitted To
Ms. Tanzina hossain
Associate professor, Department of Business
Administration
Daffodil International University
 Group list:

Name ID

Rabeya akter 193-14-917

Shakiba Sarmin 191-14-869

Tanjena Surker Ananna 193-14-931

Rahadul Islam 193-14-924

Farheen Akter 202-14-3214

Swapnil swadhinata 193-14-909

Contents
Group list:...................................................................................................................................1
Introduction................................................................................................................................3
Bond...........................................................................................................................................3
The issuer of Bond.....................................................................................................................3
Characteristics of bonds.............................................................................................................4
Bond Markets.............................................................................................................................4
Types of Bond Markets..............................................................................................................5
Corporate Bonds.....................................................................................................................5
Government Bonds.................................................................................................................5
Municipal Bonds.....................................................................................................................5
Mortgage-Backed Bonds........................................................................................................5
Prospects of a bond market in Bangladesh................................................................................5
Bond Market in Bangladesh.............................................................................................................6
Brac bank subordinated 25% convertible bond (BRACBOND)............................................7
IBBL Mudaraba perpetual bond (IBBL PBOND)..................................................................7
Global Bond Market...................................................................................................................7
Comparison................................................................................................................................8
Comparison of government bond market in some Asian countries........................................8
Maturity structure...................................................................................................................9
Reasons for sub-standard performance....................................................................................11
Lack of knowledge................................................................................................................11
Lack of promotion................................................................................................................12
Savings account dominance..................................................................................................12
Dominance of banks.............................................................................................................12
Recommendations for Bangladeshi Bond Market...................................................................12
Conclusion................................................................................................................................14
Reference..................................................................................................................................14
Introduction
Money Market/Bond market is an integral part of the financial market of a country. It
provides a medium for the redistribution of short-term loan-able funds among financial
institutions, which perform this function by selling these short-term securities that usually are
highly marketable. The money market in Bangladesh is in its transitional stage. The various
constituent parts of it are in the process of formation, while continuous efforts are being made
to develop appropriate and adequate instruments to be traded in the market. At present
Money market instruments such as Government treasury bills of varying maturity,
Bangladesh Bank Bills, Certificates of Deposits, Bankers’ Acceptance or L/C and Repo and
Reverse etc. in limited supply are available for trading in the market. However, the short-term
credit market of the banking sector experienced a tremendous growth since in recent years, a
total of about 6000 branches of the scheduled banks provided short-term credit throughout
the country in the form of cash credit, overdraft and demand loan. The paper first analyzes
the current situation of the bond markets in Bangladesh: The bond market has played a
limited role in the Bangladesh economy. The Bangladesh bond market is also rather shallow
compared to the neighboring countries.

Bond

A bond is a fixed income instrument that represents a loan made by an investor to a borrower

(typically corporate or governmental). Bonds are used by companies, municipalities, states,
and sovereign governments to finance projects and operations. Owners of bonds are debt
holders, or creditors, of the issuer. Bond details include the end date when the principal of the
loan is due to be paid to the bond owner and usually includes the terms for variable or fixed
interest payments made by the borrower.

The issuer of Bond

Governments (at all levels) and corporations commonly use bonds in order to borrow money.
Governments need to fund roads, schools, dams or other infrastructure. The sudden expense
of war may also demand the need to raise funds.

Similarly, corporations will often borrow to grow their business, to buy property and
equipment, to undertake profitable projects, for research and development or to hire
employees. The problem that large organizations run into is that they typically need far more
money than the average bank can provide. Bonds provide a solution by allowing many
individual investors to assume the role of the lender.
Characteristics of bonds

Most bonds share some common basic characteristics including:

 Face value is the money amount the bond will be worth at maturity; it is also the
reference amount the bond issuer uses when calculating interest payments. For
example, say an investor purchases a bond at a premium $1,090 and another investor
buys the same bond later when it is trading at a discount for $980. When the bond
matures, both investors will receive the $1,000 face value of the bond.
 The coupon rate is the rate of interest the bond issuer will pay on the face value of
the bond, expressed as a percentage. For example, a 5% coupon rate means that
bondholders will receive 5% x $1000 face value = $50 every year.
 Coupon dates are the dates on which the bond issuer will make interest payments.
Payments can be made in any interval, but the standard is semiannual payments.
 The maturity date is the date on which the bond will mature and the bond issuer will
pay the bondholder the face value of the bond.
 The issue price is the price at which the bond issuer originally sells the bonds.

Bond Markets

The bond market is broadly segmented into two different sectors: the primary market and the
secondary market.

The primary market is frequently referred to as the "new issues" market in which transactions
strictly occur directly between the bond issuers and the bond buyers. In essence, the primary
market yields the creation of brand-new debt securities that have not previously been offered
to the public.

In the secondary market, securities that have already been sold in the primary market are then
bought and sold at later dates. Investors can purchase these bonds from a broker, who acts as
an intermediary between the buying and selling parties. These secondary market issues may
be packaged in the form of pension funds, mutual funds, and life insurance policies—among
many other product structures.

Types of Bond Markets

The general bond market can be segmented into the following classifications
Corporate Bonds

Companies issue corporate bonds to raise money for different reasons, such as financing
current operations, expanding product lines, or opening up new manufacturing facilities.
Corporate bonds usually describe longer-term debt instruments that provide a maturity of at
least one year.

Government Bonds

National-issued government bonds (or Treasuries) entice buyers by paying out the face

value listed on the bond certificate, on the agreed maturity date, while also issuing periodic
interest payments along the way. This characteristic makes government bonds attractive to
conservative investors.

Municipal Bonds

Municipal bonds—commonly abbreviated as "muni" bonds—are locally issued by states,

cities, special-purpose districts, public utility districts, school districts, publicly-owned
airports and seaports, and other government-owned entities who seek to raise cash to fund
various projects.

Mortgage-Backed Bonds

These issues, which consist of pooled mortgages on real estate properties, are locked in by
the pledge of particular collateralize assets. They pay monthly, quarterly, or semi-annual
interest.

Prospects of a bond market in Bangladesh

Despite the earlier setbacks the bond markets in Bangladesh is ready to take off. The need for
a bond market in Bangladesh deserves attention because of the following:

 Foreign aid flow is diminishing and the trend is expected to continue.

 Specialized banks are not in a position to supply desired level of long-term fund.
 Commercial banks have strategically cut down their long-term lending.
 The concept of prudent asset mix is most likely to generate demand for investment
grade bonds.
 The Provident Funds and Insurance Companies Funds are not generally allowed to
invest their funds in stock market instruments. There is a bright possibility that these
funds may be permitted to invest a part of their funds in marketable instruments
subject to prudential guidelines, which may necessitate supply of lucrative debt
instruments.
 Reduction in the interest on Govt. savings instruments and withdrawal of certain
savings instruments is expected to boost demand for debt instruments.
 The registration fee for trust deed has been reduced from 2.5% (on the number of
debentures) to Tk. 2500.00 providing a very significant incentive.
  There are now credit rating agencies to provide rating prospective issuer.
 Any interest paid by investor on money borrowed for investment in debentures is
deducted from total income.
 Interest income not exceeding Tk. 20000 received by an individual investor on
debentures approved by SEC is excluded from total income.
 The interest on Zero coupon bond approved by SEC at the hand of the recipient is tax
exempt up to Tk. 25000.00. Such interest exceeding Tk. 25000.00 is subjected to tax
@ 10% deducted at source. Banks and other financial institutions and insurance
companies which are the mainstay of demand for bonds will now pay 10% tax on
interest on such bonds instead of 45% tax payable on other income

Bond Market in Bangladesh

Bangladesh has seen significant economic growth over the years; however, the bond market
has yet to flourish in Bangladesh capital market, which has showed very little signs of
growth. The lack of a flourishing bond market has deprived Bangladeshi investors and
companies of various benefits that they could have reaped had there been a developed bond
market.
Basically, the Bangladesh Bank sells bonds on behalf of the government and the main buyer
of the bond is the Financial Institution especially in banks. When the government is in need
of its own financing and require to provide credit to the government-owned enterprises and
institutions, they offer the bond into the market through the auction of the Bangladesh Bank.
Generally, commercial banks participate in this auction. As Bangladesh Bank sells bonds to
other commercial banks at a discount that is why commercial banks easily get their capital
during the bond maturity period at par values
On the other hand, lack of trading procedure of bonds in the secondary market is the major
reason for stock market under-developed. The activities of secondary market are limited to T-
bills and T- bonds. Besides, there is no chance of bond trading Over the Counter Market
(OTC).
Bangladesh already experienced two massive debacles respectively in 1996 and 2010-11. If
the bond market was there, the market might have been fundamentally strong.

Only 2 bonds have been listed in Dhaka stock exchange. These are:
I. Brac bank subordinated 25% convertible bond (BRACBOND)
II. IBBL Mudaraba perpetual bond (IBBL PBOND)

Brac bank subordinated 25% convertible bond (BRACBOND)

subordinated bond is ranked / prioritized lower than other debts or other classes of bonds, if
the bond issuing company falls into liquidation or bankruptcy which means in the event of
liquidation, all secured bonds and similar debts must be repaid in full before the subordinated
bond is repaid
Such bond is referred to as subordinate, because the debt providers (the lenders) have
subordinate status in relationship to the normal bond. A subordinate bond carries higher risk,
but also pays higher returns than other classes
25% of convertible bond, which means the bond holder (investor) have the option of
redeeming the entire face value of the bond in cash upon maturity or can redeem 75% in cash
and convert 25% of the bond value in the common stock of Brac Bank Ltd.

IBBL Mudaraba perpetual bond (IBBL PBOND)

 perpetual bond, which means no maturity.

 Bond holders will only receive interest (coupon) periodically from the Bond issuer
forever

Global Bond Market

Bond market serves as one of the best alternative sources of investment for investors around
the world while serving as one of the easier routes to ensuring finance for a business.
In fact, the global bond market, which stands at $100 trillion, is considerably larger than the
global stock market, which is valued at $64 trillion.

At present ‘corporate bond’ is the single most important source of capital for the most of the
companies around the globe. A well-structured, sound and efficient bond market is a
principal instrument of financial market structure, providing capital for issuers and
investment opportunities for a greater number of savers and investors.

The United States is the largest market with 33% of the total followed by Japan (14%). As a
proportion of global GDP, the bond market increased to over 140% in 2019 from 119% in
2018 and 80% a decade earlier. The considerable growth means that in March 2019 it was
much larger than the global equity market which had a market capitalization of around $53
trillion.

In recent years corporate borrowers in Asia were very much attracted towards long-term debt
instruments, especially bond market. The reasons are given below:

 Strong fundamentals and reasonable interest rates along with smooth creditworthiness
are the key factors that spurred Asia’s borrowing spree.
 The strong bond market can serve as a resilient weapon to spare ‘tire effect’. That means
in case of any money market crisis the bond market plays a significant role where the
money market is interlinked with the capital market.

India’s capital market is far stronger than our capital market with a diverse mix of long-term
instruments. Various initiatives are now being taken in Asia to strengthen cooperation among
Asian countries have contributed immensely to the development of the bond market.

Comparison

The debt market in Bangladesh comprises mainly of two categories, firstly the Government
securities and the second category comprises of the corporate bonds. The actual status of the
bond market of Bangladesh is stated below:

Comparison of government bond market in some Asian countries

The size of Bangladesh government bond market which is 17.1% of GDP has not developed
on the similar line as of other emerging East Asian bond market like China, Singapore,
Malaysia and Thailand. India has the largest part of Government bond market of all the south
Asian countries while Bangladesh holds the lowest position with the size of 17.1% of GDP.

Table: Sizes of Some Asian Bond Markets (% of GDP)

Category Korea Malay China Sing Thail Phili India Sri Pak BD
and p

Governmen 48.8 48.1 46.1 41.2 40.7 33.3 36.1 31.6 27.5 17.1
t

Corporate 61.8 37.5 4.7 30.7 15.9 3.5 3.9 - - -

Maturity structure

A mature bond market exhibits longer average maturity since investors’ confidence is gauged
by their willingness to commit resources to longer time horizons (Barry and Pipat 2004). In
South Asia, India is the only country to have succeeded in building a risk-free sovereign yield
curve that can provide guidance to market players across the broad spectrum of maturities.
Bangladesh is nowhere near it.

i. Analysis on finance indicators: In terms of the assessment of Finance Indicators as

depicted in (Table-4.2), India has the soundest financial sector among the south Asian
economies. It occupied the top rank with an overall composite score. Bangladesh
stands fourth among the south asian countries. Bangladesh is not doing well on three
micro indicators namely capital market development, market concentration and
competitiveness, and financial stability.

Table: 4.2 Finance Indicators for South Asian Countries during 2001-09

Individual India Pakistan Sri Lanka Bangladesh Nepal

indicators rank

Overall rank 1 2 3 4 5

Access to 3 4 1 2 5
finance

Performance 3 1 2 4 4
and efficiency
 Capital market 1 2 3 4 5
development

Market 1 4 5 2 3
concentration
and
competitiveness

Financial 1 2 3 4 5
stability

Source: Getting Finance Indicators.

Bangladesh bond market size when compared with the neighboring countries market is
significantly lower as shown in the graph below:

As the chart above shows, Bangladesh corporate bond as a percentage of GDP is the lowest
among the countries of South Asia while the bond market overall is also very small compared
to GDP at 0.13% and 6.43% respectively. India leads the way in corporate bond market with
a size of INR 21,144,414,702,340, which represents about 11.42% of their GDP. The Indian
capital market has developed significantly over the last decade and their developments have
not only been focused on the stock market but also on the bond market. On the contrary,
Bangladesh’s bond market has not developed as compared to its GDP.

Reasons for sub-standard performance

Lack of knowledge

One of the prime reasons for the underdevelopment of the bond market in Bangladesh is the
lack of understanding of bond market itself. The general investors are not educated and do
not possess the financial literacy required to understand the mechanisms of a bond. The
average investor has very limited knowledge about investing in stocks and many investors are
a victim of herding in Bangladesh. In spite of having an underdeveloped stock market, the
public is still yet to learn the basics of investing, while the bond market is close to non-
existent.

Lack of promotion

It has been seen that the issuers of bond prefer to issue the significant number of bonds in
private placements. Islamic bank’s Modaraba bond issued 50%, BRAC Bank issued 90% and
ACI issuing 40% of their bonds at private placements. This indicates that institutions do not
prefer to issue bonds to the public but instead opt for the easier and cheaper route of issuing
bonds to an institute.

Savings account dominance

Another key factor in the underdevelopment of bond market has been the general notion in
Bangladesh, which has always been saving their money in bank accounts, which offer a very
small and fixed rate of interest in a hassle-free manner - a feature preferred by the public in
Bangladesh. The concept of investing in capital markets is still in developing stage in
Bangladesh and most people avoid investing in capital market due to rumors of it being
rigged and manipulated by the big players in the market. Therefore, people’s attention has
mostly been towards the savings account at banks instead of stocks and bond.

Dominance of banks

High concentration of banks is also a key reason why bond market has not flourished. There
are 58 scheduled banks in Bangladesh – a number too high considering the size of the
economy. High concentration of banks in the financial system has made it very difficult for
other alternatives to flourish such as the bond market. This reasoning is supported by Rajan
and Zingales’s (2003) “interest group” theory of financial development that banks appear to
oppose corporate debt market development as a potential force for their own
disintermediation.

Recommendations for Bangladeshi Bond Market

Recent developments and events have already created an environment conducive to fosterage
of the debt market. A number of financial institutions have sold bonds or debentures to
institutions. Further, an Islami Bank has decided to issue perpetual bond subject to approval
of relevant authorities. It is also expected that quite a number of institutions will float bonds
through securitization in the near further. A sustainable bond market needs enabling policies.
The following actions and policy measures are seen important to promote a bond market in
Bangladesh.

 All issues of debentures be rated by independent rating agency prior to issue.

Companies issuing bonds/debentures to public may be rated
 periodically to keep track of issuing company’s financial position
 Public utilities and infrastructure projects be asked to raise a part of debt
through issue of marketable bonds.
 Industrial companies with good track record be advised to issue marketable
bonds instead of relying on bank financing.
 Existing public utilities and infrastructure projects be advised to securities
debts by issuing marketable bonds.
 Existing industrial companies be encouraged to replace a portion of bank/DFI
loans with marketable bonds.
 To facilitate liquidity of marketable bonds, discounting facilities may be
provided by financial institutions.
 Systems of market makers (specialists) may be evolved to facilitate market for
marketable bonds.
 Bond maturities be diversified between one year and seven years as to give
investors with different maturity profiles the option of purchasing debentures
with different maturities.
 The methods of revolving underwriting facility (RUF) may be introduced so
that companies can issue short-term debentures whenever necessity arises.
RUF is a system in which a consortium of underwriters make commitment to
the issuing company to purchase all the unsold portions of the short-term
debentures which may be issued from time to time during a certain period (e.g.
five years) up to certain maximum amount.
 Coupon rates and all other issuing conditions of debentures be determined by
market forces.
 Coupon rates may differ according to the rating of the issuer accorded by
independent rating agency.
 In order to make long-term investment more attractive, issuers may find it
useful to increase the coupon rate as years go by, e.g. 9 percent in the first
year, 10 percent in the second year, 11 percent in the third year and so on.
Such increasing coupon rate methods will be useful, especially if the investor
is given the right to call for redemption of the bonds at the end of each year so
that he may choose to hold them to enjoy a higher coupon rate.
  Interest received by individual investors on bonds/debentures approved by
SEC may be fully exempted from tax.
 Investment in bonds/debentures approved by SEC may be given tax-exempt
status up to a certain limit.
 The tax rates/relief available to investors on Zero coupon bonds may be
extended to all other bonds/debentures approved by SEC.

If all the above things can be done, then this could pave the path for a well-functioning bond
market that can change the existing bank-oriented financial system to a multilayered system,
where capital markets can complement bank financing.

Conclusion

For a bond market to function well, we need to determine demand and supply of finances for
infrastructure projects first. Consequently, investors’ expectations against actual offerings in
current market should be identified. A road map for the bond market, awareness programmed
for investors, regulatory institutions and issuers, reduction in transaction costs of bond
issuances, financial and tax incentives for both issuers and investors can make significant
contributions to long-term infrastructure financing through developing the bond market in
Bangladesh.

Reference

Jeff Madhura. “Financial Markets and Institutions” Thomson south-western

https://en.wikipedia.org/wiki/Bond_market
http://www.bangladesh-bank.org/seminar/iwdbmbd/seciia06.html
https://tbsnews.net/thoughts/bond-market-bangladesh-why-it-still-far-cry-92881
https://en.wikipedia.org/wiki/Bond_markets_in_East_Asia_and_South_East_Asia