Bangladesh Institute of Capital Market

Post graduate Diploma in Capital Market (PGDCM)

Course Name: Securities Analysis

Assignment Topics: BONDS

Date of Submission: 10 June 2020

Faculty: Sagira Sultana Provaty

Lecturer, BICM

Submitted By

Name: Morshedul Alam

ID: D -13-06 (Batch-13)

What Is a Bond?
A bond is a fixed income instrument that represents a loan made by an investor
to a borrower (typically corporate or governmental). A bond could be thought of
as an I.O.U. between the lender and borrower that includes the details of the loan
and its payments. Bonds are used by companies, municipalities, states, and
sovereign governments to finance projects and operations. Owners of bonds are
debtholders, 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.

KEY TAKEAWAYS

 Bonds are units of corporate debt issued by companies and securitized as

tradeable assets.
 A bond is referred to as a fixed income instrument since bonds traditionally
paid a fixed interest rate (coupon) to debtholders. Variable or floating
interest rates are also now quite common.
 Bond prices are inversely correlated with interest rates: when rates go up,
bond prices fall and vice-versa.
 Bonds have maturity dates at which point the principal amount must be
paid back in full or risk default.

The Issuers of Bonds

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.
Indeed, public debt markets let thousands of investors each lend a portion of the
capital needed. Moreover, markets allow lenders to sell their bonds to other
investors or to buy bonds from other individuals—long after the original issuing
organization raised capital.

How Bonds Work

Bonds are commonly referred to as fixed income securities and are one of
three asset classes individual investors are usually familiar with, along with
stocks (equities) and cash equivalents.
Many corporate and government bonds are publicly traded; others are traded
only over-the-counter (OTC) or privately between the borrower and lender.

When companies or other entities need to raise money to finance new projects,
maintain ongoing operations, or refinance existing debts, they may issue bonds
directly to investors. The borrower (issuer) issues a bond that includes the terms
of the loan, interest payments that will be made, and the time at which the loaned
funds (bond principal) must be paid back (maturity date). The interest
payment (the coupon) is part of the return that bondholders earn for loaning their
funds to the issuer. The interest rate that determines the payment is called
the coupon rate.

The initial price of most bonds is typically set at par, usually $100 or $1,000 face
value per individual bond. The actual market price of a bond depends on a
number of factors: the credit quality of the issuer, the length of time until
expiration, and the coupon rate compared to the general interest rate
environment at the time. The face value of the bond is what will be paid back to
the borrower once the bond matures.

Most bonds can be sold by the initial bondholder to other investors after they
have been issued. In other words, a bond investor does not have to hold a bond
all the way through to its maturity date. It is also common for bonds to be
repurchased by the borrower if interest rates decline, or if the borrower’s credit
has improved, and it can reissue new bonds at a lower cost.

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.

Two features of a bond—credit quality and time to maturity—are the principal

determinants of a bond's coupon rate. If the issuer has a poor credit rating,
the risk of default is greater, and these bonds pay more interest. Bonds that have
a very long maturity date also usually pay a higher interest rate. This higher
compensation is because the bondholder is more exposed to interest rate and
inflation risks for an extended period.

Credit ratings for a company and its bonds are generated by credit rating
agencies like Standard and Poor’s, Moody’s, and Fitch Ratings. The very highest
quality bonds are called ―investment grade‖ and include debt issued by the U.S.
government and very stable companies, like many utilities. Bonds that are not
considered investment grade, but are not in default, are called ―high yield‖ or
―junk‖ bonds. These bonds have a higher risk of default in the future and
investors demand a higher coupon payment to compensate them for that risk.

Bonds and bond portfolios will rise or fall in value as interest rates change. The
sensitivity to changes in the interest rate environment is called ―duration.‖ The
use of the term duration in this context can be confusing to new bond investors
because it does not refer to the length of time the bond has before maturity.
Instead, duration describes how much a bond’s price will rise or fall with a
change in interest rates.

The rate of change of a bond’s or bond portfolio’s sensitivity to interest rates

(duration) is called ―convexity‖. These factors are difficult to calculate, and the
analysis required is usually done by professionals.

Categories of Bonds
There are four primary categories of bonds sold in the markets. However, you
may also see foreign bonds issued by corporations and governments on some
platforms.

 Corporate bonds are issued by companies. Companies issue bonds rather

than seek bank loans for debt financing in many cases because bond
markets offer more favorable terms and lower interest rates.
 Municipal bonds are issued by states and municipalities. Some municipal
bonds offer tax-free coupon income for investors.
 Government bonds such as those issued by the U.S. Treasury. Bonds
issued by the Treasury with a year or less to maturity are called ―Bills‖;
bonds issued with 1–10 years to maturity are called ―notes‖; and bonds
issued with more than 10 years to maturity are called ―bonds‖. The entire
 category of bonds issued by a government treasury is often collectively
referred to as "treasuries." Government bonds issued by national
governments may be referred to as sovereign debt.
 Agency bonds are those issued by government-affiliated organizations
such as Fannie Mae or Freddie Mac.

Varieties of Bonds
The bonds available for investors come in many different varieties. They can be
separated by the rate or type of interest or coupon payment, being recalled by
the issuer, or have other attributes.

Zero-coupon bonds do not pay coupon payments and instead are issued at a
discount to their par value that will generate a return once the bondholder is paid
the full face value when the bond matures. U.S. Treasury bills are a zero-coupon
bond.

Convertible bonds are debt instruments with an embedded option that allows
bondholders to convert their debt into stock (equity) at some point, depending on
certain conditions like the share price. For example, imagine a company that
needs to borrow $1 million to fund a new project. They could borrow by issuing
bonds with a 12% coupon that matures in 10 years. However, if they knew that
there were some investors willing to buy bonds with an 8% coupon that allowed
them to convert the bond into stock if the stock’s price rose above a certain
value, they might prefer to issue those.

The convertible bond may the best solution for the company because they would
have lower interest payments while the project was in its early stages. If the
investors converted their bonds, the other shareholders would be diluted, but the
company would not have to pay any more interest or the principal of the bond.

The investors who purchased a convertible bond may think this is a great
solution because they can profit from the upside in the stock if the project is
successful. They are taking more risk by accepting a lower coupon payment, but
the potential reward if the bonds are converted could make that trade-off
acceptable.

Green Bond
A green bond is a type of fixed-income instrument that is specifically earmarked
to raise money for climate and environmental projects. These bonds are typically
asset-linked and backed by the issuing entity's balance sheet, so they usually
carry the same credit rating as their issuers’ other debt obligations.
Callable bonds also have an embedded option but it is different than what is
found in a convertible bond. A callable bond is one that can be ―called‖ back by
the company before it matures. Assume that a company has borrowed $1 million
by issuing bonds with a 10% coupon that mature in 10 years. If interest rates
decline (or the company’s credit rating improves) in year 5 when the company
could borrow for 8%, they will call or buy the bonds back from the bondholders
for the principal amount and reissue new bonds at a lower coupon rate.

A callable bond is riskier for the bond buyer because the bond is more likely to be
called when it is rising in value. Remember, when interest rates are falling, bond
prices rise. Because of this, callable bonds are not as valuable as bonds that
aren’t callable with the same maturity, credit rating, and coupon rate.

Potable bond allows the bondholders to put or sell the bond back to the
company before it has matured. This is valuable for investors who are worried
that a bond may fall in value, or if they think interest rates will rise and they want
to get their principal back before the bond falls in value.

The bond issuer may include a put option in the bond that benefits the
bondholders in return for a lower coupon rate or just to induce the bond sellers to
make the initial loan. A puttable bond usually trades at a higher value than a
bond without a put option but with the same credit rating, maturity, and coupon
rate because it is more valuable to the bondholders.

The possible combinations of embedded puts, calls, and convertibility rights in a

bond are endless and each one is unique. There isn’t a strict standard for each of
these rights and some bonds will contain more than one kind of ―option‖ which
can make comparisons difficult. Generally, individual investors rely on bond
professionals to select individual bonds or bond funds that meet their investing
goals.

Pricing Bonds
The market prices bonds based on their particular characteristics. A bond's price
changes on a daily basis, just like that of any other publicly-traded security,
where supply and demand in any given moment determine that observed price.
But there is a logic to how bonds are valued. Up to this point, we've talked about
bonds as if every investor holds them to maturity. It's true that if you do this
you're guaranteed to get your principal back plus interest; however, a bond does
not have to be held to maturity. At any time promised to pay a coupon based on
the face value of the bond—so for a $1,000 par, 10% annual coupon bond, the
issuer will pay the bondholder $100 each year.
Say that prevailing interest rates are also 10% at the time that this bond is
issued, as determined by the rate on a short-term government bond. An investor
would be indifferent investing in the corporate bond or the government bond
since both would return $100. However, imagine a little while later, that the
economy has taken a turn for the worse and interest rates dropped to 5%. Now,
the investor can only receive $50 from the government bond, but would still
receive $100 from the corporate bond.

This difference makes the corporate bond much more attractive. So, investors in
the market will bid up to the price of the bond until it trades at a premium that
equalizes the prevailing interest rate environment—in this case, the bond will
trade at a price of $2,000 so that the $100 coupon represents 5%. Likewise, if
interest rates soared to 15%, then an investor could make $150 from the
government bond and would not pay $1,000 to earn just $100. This bond would
be sold until it reached a price that equalized the yields, in this case to a price of
$666.67.

Inverse to Interest Rates

This is why the famous statement that a bond’s price varies inversely with
interest rates works. When interest rates go up, bond prices fall in order to have
the effect of equalizing the interest rate on the bond with prevailing rates, and
vice versa.

Another way of illustrating this concept is to consider what the yield on our bond
would be given a price change, instead of given an interest rate change. For
example, if the price were to go down from $1,000 to $800, then the yield goes
up to 12.5%. This happens because you are getting the same guaranteed $100
on an asset that is worth $800 ($100/$800). Conversely, if the bond goes up in
price to $1,200, the yield shrinks to 8.33% ($100/$1,200).

Yield-to-Maturity (YTM)
The yield-to-maturity (YTM) of a bond is another way of considering a bond’s
price. YTM is the total return anticipated on a bond if the bond is held until the
end of its lifetime. Yield to maturity is considered a long-term bond yield but is
expressed as an annual rate. In other words, it is the internal rate of return of an
investment in a bond if the investor holds the bond until maturity and if all
payments are made as scheduled. YTM is a complex calculation but is quite
useful as a concept evaluating the attractiveness of one bond relative to other
bonds of different coupon and maturity in the market. The formula for YTM, a
bondholder can sell their bonds in the open market, where the price can
fluctuate, sometimes dramatically.
The price of a bond changes in response to changes in interest rates in the
economy. This is due to the fact that for a fixed-rate bond, the issuer has

involves solving for the interest rate in the following equation, which is no easy
task, and therefore most bond investors interested in YTM will use a computer:

Face Value
YTM = ----------------- − 1
Present Value

We can also measure the anticipated changes in bond prices given a change in
interest rates with a measure knows as the duration of a bond. Duration is
expressed in units of the number of years since it originally referred to zero-
coupon bonds, whose duration is its maturity.

For practical purposes, however, duration represents the price change in a bond
given a 1% change in interest rates. We call this second, more practical definition
the modified duration of a bond.

The duration can be calculated to determine the price sensitivity to interest rate
changes of a single bond, or for a portfolio of many bonds. In general, bonds with
long maturities, and also bonds with low coupons have the greatest sensitivity to
interest rate changes. A bond’s duration is not a linear risk measure, meaning
that as prices and rates change, the duration itself changes,
and convexity measures this relationship.

Real World Bond Example

A bond represents a promise by a borrower to pay a lender their principal and
usually interest on a loan. Bonds are issued by governments, municipalities, and
corporations. The interest rate (coupon rate), principal amount and maturities will
vary from one bond to the next in order to meet the goals of the bond issuer
(borrower) and the bond buyer (lender). Most bonds issued by companies
include options that can increase or decrease their value and can make
comparisons difficult for non-professionals. Bonds can be bought or sold before
they mature, and many are publicly listed and can be traded with a broker.

While governments issue many bonds, corporate bonds can be purchased from
brokerages. If you're interested in this investment, you'll need to pick a broker.
You can take a look at Investopedia's list of the best online stock brokers to get
an idea of which brokers best fit your needs.
Because fixed-rate coupon bonds will pay the same percentage of its face value
over time, the market price of the bond will fluctuate as that coupon becomes
more or less attractive compared to the prevailing interest rates.

Imagine a bond that was issued with a coupon rate of 5% and a $1,000 par
value. The bondholder will be paid $50 in interest income annually (most bond
coupons are split in half and paid semiannually). As long as nothing else
changes in the interest rate environment, the price of the bond should remain at
its par value.

However, if interest rates begin to decline and similar bonds are now issued with
a 4% coupon, the original bond has become more valuable. Investors who want
a higher coupon rate will have to pay extra for the bond in order to entice the
original owner to sell. The increased price will bring the bond’s total yield down to
4% for new investors because they will have to pay an amount above par value
to purchase the bond.

On the other hand, if interest rates rise and the coupon rate for bonds like this
one rise to 6%, the 5% coupon is no longer attractive. The bond’s price will
decrease and begin selling at a discount compared to the par value until its
effective return is 6%.

The bond market tends to move inversely with interest rates because bonds will
trade at a discount when interest rates are rising and at a premium when interest
rates are falling.

Bonds in Bangladesh
From the Beginning Bond Market means any place or incidence of transaction in
which any kind of bonds changes hands. Before independence, the use of bonds
as a means of resource mobilization was virtually non-existent in Bangladesh.
Immediately after liberation, the government of Bangladesh reissued long-term
bonds accepting the liabilities of the Income Tax Bonds and the Defense Bonds
of the Pakistan government held by Bangladeshi nationals and institutions. The
government also issued a 5% non-negotiable bond to Bangladeshi shareholders
of nationalized industries. In addition, savings bonds were also issued to pay for
the value of demonetized 100-taka notes in 1974. Most of these bonds are held
by Bangladesh bank.
 The first effort to mobilize savings for use of development expenditure was the
issue of Wage Earners Development Bonds in 1981 to be sold to Bangladeshi
wage earners abroad. Later, a two-year special treasury bond was issued in
January 1984 to be sold to individuals, public and private sector organizations
including banks. In December 1985, another instrument, the National Bond, was
issued to be sold to non-bank investors.

Government: the active participant

During the implementation period of the financial sector reform program that took
effect from 1990, nationalized commercial banks, specialized banks and
development financial institutions had to make considerable provisions for huge
classified loans. As a result, the capital base of those banks and financial
institutions eroded severely and their viability was seriously threatened. In this
situation, the government issued a series of bonds to restructure the capital base
of these banks and financial institutions as well as to assume the liabilities of the
bad loans made to a number of public sector organizations.

The government also issued some bonds for augmenting loanable funds for
specialized banks and financial institutions. Moreover, some bonds were also
issued to mobilize funds for a number of public sector organizations like the T&T
Board, Bangladesh Biman etc.

Following is a list of bonds issued by the government on various

occasions:
1. 15-year treasury bond (recapitalization and bad debt provisioning, issued
30.12.1990)
2. 3-year Jatiya Biniyog Bond (national investment bond, issued 30.12. 1985)
3. Interest-free treasury bond (issued 1988, withdrawn from 15.10.1993)
4. treasury bond to specialized banks (issued 2.5.1993)
5. 3-year T & T bond (for digital telephone installation, issued 29.12.1993)
6. 3-year special treasury bond (for reimbursement of losses on A/C of working
capital, issued 1.7.1993)
7. 15-year treasury bond (capitalization, provisioning and agricultural loans write-off,
issued 16.10.1993)
8. 25-year treasury bond (jute sector liquidation, issued 1.11.1993)
9. 3-year treasury bond (reconstitution of BSRS, issued 16.4.1994)
10. interest free treasury bond (issued 30.6.1994)
11. 2-year treasury bond (issued 15.7.1995) for reimbursement of agricultural
loan remission,)
12. 3-year treasury bond (reimbursement of loss in jute sector, issued
1.7.1994)
13. 3-year T&T bond (for digital telephone installation, issued 7.8.1994)
14. 3-year treasury bond (reimbursement of loan loss in BADC, issued
29.6.1995)
15. 3-year treasury bond (reimbursement of loan loss in BTMC, issued
29.6.1995)
16. 3-year T & T bond (for digital telephone installation, issued 30.1.1995)
17. 3-year jute treasury bond (for jute sector, issued 1.7.1995)
18. 25-year treasury bond (jute sector liquidation, issued 30.6.1994)
19. 5-year Biman treasury bond (to increase share capital of Biman, issued
29.6.1995)
20. 3-year jute treasury bond (issued 1.7.1995)
21. 25-year jute treasury bond (private banks jute loan liquidation, issued
1.7.1995)
22. 15-year agriculture treasury bond (reimbursement of agricultural loan
remission, issued 16.4.1996)
23. 3-year T & T bond (for digital telephone installation, issued 30.11.1996)
24. 3-year treasury bond (reconstitution of BSRS, issued 19.6.1997)
25. 5-year Biman treasury bond (share capital, issued 1.4.1997)
26. 3-year treasury bond (reimbursement of loan loss in BTMC, issued
26.5.1996)
27. 3-year T & T bond (for digital telephone installation, issued 22.6.1999)
28. 10-year jute treasury bond (for jute sector, issued 1.7.1995)
29. 5-year Biman treasury bond (issued 25.5.1998)
30. 5-year Biman treasury bond (issued 15.7.1998)
31. 10-year BSC treasury bond (to meet the loss of BSC, issued 1.7.1998)
32. 10-year jute treasury bond (for jute sector, issued 1.7.1995)
33. 3-year T&T bond (issued 18.8.1999)
34. 3-year treasury bond (bad loan provisioning, issued 1.1.2000).

Market condition:

Marketability of bonds issued in the country is very limited. The bulk of these
bonds is held by the nationalized commercial banks. The few specialized and
some private banks hold a part of them. Individuals and non-bank financial
institutions also hold some of these bonds. Therefore, the main market of these
bonds so far are being provided by the banks which hold them due to the
government allocation system, as well as to maintain statutory liquidity
requirements (SLR). Many of these bonds are non-negotiable. As there is no
secondary market in the country, the holders of these bonds have to wait till the
date of maturity for their encashment. [source: seminar of Syed Ahmed Khan and
A Samad Sarker on bond market in Bangladesh]

Treasury’s action:

The treasury, as on behalf of the govt., quite often issues Treasury bonds. As
govt. has almost zero default risk, these bonds are highly liquid and have quite a
good demand among institutional investors. They are also listed in Dhaka stock
exchange, although they are rarely traded there.

The treasury obtains long term funding through Treasury bond auctions, which
are conducted through periodic auctions in Bangladesh bank. They are normally
held in the middle of each quarter. The treasury announces its auction plan, the
date, amount needed, bonds maturity etc. at the time of the auction, institutional
investors submit their bids themselves or through their brokers.
In our country, commonly the treasury issues bonds of two different maturities, 5-
year and 10-year. Currently the coupon rate on 5-year treasury bond is 7.5% and
on 10-year treasury bond is 8.5%.

Below is a list of treasury bonds issued by treasury and are currently listed in the
stock exchange-

10-year treasury bond 5-year treasury bond

T10Y0214 ( 8.5% BGT Bond Issued T5Y0209 ( 7.5% BGT Bond Issued
090204 ) 090204 )

T10Y0215 ( 8.5% BGT Bond Issued T5Y0210 ( 7.5% BGT Bond Issued
070205 ) 070205 )

T10Y0216 ( 8.5% BGT Bond Issued T5Y0211 ( 7.5% BGT Bond Issued
13022006 ) 13022006 )

T10Y0414 ( 8.5% BGT Bond Issued T5Y0409 ( 7.5% BGT Bond Issued
050404 ) 050404 )

T10Y0415 ( 8.5% BGT Bond Issued T5Y0410 ( 7.5% BGT Bond Issued
040405 ) 040405 )

T10Y0416 ( 8.5% BGT Bond Issued T5Y0411 ( 7.5% BGT Bond Issued
10042006 ) 10042006 )

T10Y0614 ( 8.5% BGT Bond Issued T5Y0609 ( 7.5% BGT Bond Issued
070604 ) 070604 )

T10Y0615 ( 8.5% BGT Bond Issued T5Y0610 ( 7.5% BGT Bond Issued
060605 ) 060605 )
T10Y0616 ( 8.5% BGT Bond Issued T5Y0611 ( 7.5% BGT Bond Issued
12062006 ) 12062006 )

T10Y0814 ( 8.5% BGT Bond Issued T5Y0809 ( 7.5% BGT Bond Issued
020804 ) 020804 )

T10Y0816 ( 8.5% BGT Bond Issued T5Y0811 (5 Year 7.5% BGT Bond Issued
07.08.2006 ) 07.08.2006 )

T10Y0916 ( 8.5% BGT Bond Issued T5Y0911 ( 7.5% BGT Bond Issued
06.09.2006 ) 20.09.2006 )

T10Y1014 ( 8.5% BGT Bond Issued T5Y1009 ( 7.5% BGT Bond Issued
041004 ) 041004 )

T10Y1016 ( 8.5% BGT Bond Issued T5Y1011 ( 7.5% BGT Bond Issued
04.10.2006 ) 18.10.2006 )

T10Y1213 ( 8.5% BGT Bond Issued T5Y1208 ( 7.5% BGT Bond Issued
291203 ) 291203 )

T10Y1214 ( 8.5% BGT Bond Issued T5Y1209 ( 7.5% BGT Bond Issued
061204 ) 061204 )

T10Y1215 ( 8.5% BGT Bond Issued T5Y1210 ( 7.5% BGT Bond Issued
121205 ) 121205 )
Debentures in Bangladesh

The Beginning:

Although debentures have not received that much popularity among firms in our
country, there do seems to be a few number of companies that thought it as a
good way to collect funds. Among these firms, Beximco group gets maximum
attention as most of these debentures are issued by subsidiaries of this group.

Table 2. Prominent Issuers in the Debenture Market

Issued
debenture

(in
Coupon Year of
millions of
Debenture issuing
company rate flotation Tk.)

Beximco Infusion
Ltd. 17 1992 14.5

Beximco
Synthetics Ltd. 14 1993 240.8

Bangladesh
Chemical
Industries Ltd. 17 1993 3.2
Eastern Housing
Ltd. 15 1994 202.5

Beximco Knitting
Ltd. 14 1994 188.4

Beximco Fisheries
Ltd. 14 1994 94.3

Beximco Textile
Ltd. 14 1995 222.8

Debentures
B.D. Zipper Ind.
Ltd. 14 1995 22.4 were first issued
in Bangladesh by
Beximco Denim Beximco infusion
Ltd. 14 1995 278.5
ltd in 1992. later
on, a few more
Bangladesh
14 1996 135.0 companies took
Luggage Ind.
initiatives to use
Aramit Cement debentures as a
Ltd. 14 1998a 112.5 source of
financing. As a
No debentures were issued in 1997. result,
debentures did
find their place in
our financial market in the subsequent years, as we see in the following table.

Current position

Currently there are 8 debentures listed in the Dhaka stock exchange and 4 in the
Chittagong stock exchange. These are-
 Coupon Debenture Debenture
Company rate name in DSE name in CSE

Aramit cement Ltd. 14% DEBARACOM DEBARACOM

Bangladesh
luggage ind. Ltd. 14% DEBBDLUGG DEBBDLUGG

BD welding
electronics ltd. 15% DEBBDWELD DEBBDWELD

Bangladesh zipper
ind. Ltd. 14% DEBBDZIPP DEBBDZIPP

Beximco denims
ltd. 14% DEBBXDENIM –

Beximco fisheries
ltd. 14% DEBBXFISH –

Beximco knittings
ltd. 14% DEBBXKNI –

Beximco textiles ltd. 14% DEBBXTEX –

Total 08 04

Although they are listed, they are almost never traded in the secondary market.
This may be either due to the lack of interest and knowledge of investors or the
weak structure of our market. Lack of information can also be accused for this.
However, despite their insignificance, debentures are still categorized as an
important section of financial market. As a result, in our stock exchanges, there is
a separate section where debentures are listed.

A brief description of the debentures and the issuing companies is given below:i.
Beximco Denims Ltd.

The Beximco Denims Ltd was incorporated in Bangladesh as a Public Ltd

Company. It has commenced commercial operation in 1995 and also went into
the public issue of shares and debentures in the same year.

The Debentures of the company is listed with Dhaka Stock Exchange. The
Company Was a member enterprise of the Beximco conglomerate and the
address of the registered office of the Company is House No. 17, Road No. 2,
Dhanmondi Residential Area, Dhaka 1205. The industrial unit (the factory) is
being located at Beximco Industrial Park in Sarabo of Gazipur. The debentures
issued by the company have reached their maturity and thus have expired.

ii. Beximco Knitting Ltd.

The Beximco Knitting Limited was incorporated in Bangladesh as a public

company with limited liability on 20 May 1993. It has commenced commercial
operation in 1995 and also went into the public issue of shares and debentures in
1994. The debentures of the Company is listed with Dhaka Stock Exchange.

The Company is a member enterprise of the Beximco conglomerate and the

address of the registered office of the Company is House No.17, Road No.2,
Dhanmondi Residential Area, Dhaka 1205. The industrial unit (the factory) is
being located at Beximco Industrial Park at Sarabo of Gazipur. The debentures
issued by the company have reached their maturity and thus have expired.

iii. Beximco Synthetics Ltd.

Beximco Synthetics Limited, a member of the BEXIMCO Group, was
incorporated in Bangladesh as a public limited company. It commenced
commercial operation in July 1994 and went for public issue of shares and
debentures in 1993.

The debentures of the Company are listed in the Dhaka Stock Exchange of
Bangladesh. The registered office of the Company is located at House No.17,
Road No.2, Dhanmondi Residential Area, Dhaka-1205. The industrial units are
located at Kabirpur, Savar, Dhaka. The debentures issued by the company have
reached their maturity and thus have expired.

iv. Beximco Textiles Ltd.

Beximco Textiles Limited, a member of the BEXIMCO Group, was incorporated

in Bangladesh as a public limited company. The company issued debentures in
Dhaka stock market in 1995.The Company is a member enterprise of the
Beximco conglomerate and the address of the registered office of the Company
is House No.17, Road No.2, Dhanmondi Residential Area, Dhaka 1205. The
debentures issued by the company have reached their maturity in 2006 and thus
have expired.

v. Aramit cement Ltd

Aramit cement limited, a member of aramit group, was incorporated in

Bangladesh as a public limited company. It issued debenture in Dhaka and
Chittagong stock exchange in 1998.
vi. Bangladesh Luggage industries ltd.

Bangladesh luggage industries ltd. was incorporated in Bangladesh as a public

limited company. It issued debenture in Dhaka and Chittagong stock exchange in
1996. The debentures issued by the company have reached their maturity and
thus have expired.

vii. Bd. welding electronics Ltd.

Bangladesh welding electronics limited was incorporated in Bangladesh as a

public limited company and it issued its debentures in both Dhaka and
Chittagong stock market. The debentures issued by the company have reached
their maturity and thus have expired.

viii. Bangladesh zipper industries limited.

Bangladesh zipper industries limited is a public limited company incorporated in

Bangladesh. It issued debentures in Dhaka stock exchange in 1995. The
debentures issued by the company have reached their maturity and thus have
expired.

ix. Beximco fisheries Ltd.

Beximco Fisheries Limited, a member of the BEXIMCO Group, was incorporated

in Bangladesh as a public limited company. It went for public issue of debentures
in 1994.the debentures of the company are listed in Dhaka stock exchange.

Outside the market:

HBFC DEBENTURE: During the period from 1973 through 30th june,2000, the
house building finance corporation (HBFC) have raised total funds of Tk.
1,872.00 crores(provisional) by selling debentures to the Bangladesh bank, the
commercial banks and the sadharan bima corporation. After repayment of Tk.
227.66(Provisional) crores, the outstanding balance against debentures stood at
Tk. 1,644.34(Provisional) crores as on 30th June, 2000. Bangladesh Bank’s
debenture financing to the Corporation stood at Tk. 1,169.95(Provisional) crores
up to 30th June, 2000. The weighted average rate of interest paid by the HBFC
against debentures declined slightly to 4.77 percent in 1999-2000 from 4.79
percent in the preceding year. It may be recalled that the HBFC sold debentures
in 1997/98 at a rate of interest of 8.0 percent. On the other hand, the weighted
average rate of interest on loans disbursed by the HBFC remained unchanged at
11.17 percent during the year under report. Total liabilities of the HBFC
increased by Tk. 46.53 crores to Tk. 3,018.77(Provisional) crores at the end of
June, 2000 from Tk. 2,972.24 crores as of end June of the preceding year.

Government securities market: The government securities market in

Bangladesh is small, does not provide much of a yield curve to support a
corporate bond market, and does not provide intermediaries with skills and a
profit base to support the corporate bond market. At present, the government
issues long-term savings certificates at high interest rates and government
bonds, and it only has market-oriented rates for T-bills.
T-Bills: T-bills are auctioned weekly for 91 days and the Bangladesh Bank (BB)
occasionally issues paper for 180 days, 365 days, and 720 days. Commercial
banks participate in auctions weekly for 91-day T-bills, whereas the others are
issued occasionally. Accepted bids are noted in the newspapers. The market is
small, with outstandings of about US$800 million. There is no secondary market
and no market for repurchase agreements (―repos‖). T-bills are transferable, but
settlement is manual and very slow, done through BB. On the whole, T-bills are
mainly used to satisfy statutory liquidity requirements (SLRs).

Government bonds, with maturities ranging from 3 to 25 years, are issued when
needed; they do not create a yield curve as T-bonds are nontransferable, mostly
because they are issued to recapitalize state-owned banks. Their notable feature
is that they are guaranteed by the government and are eligible for
SLRs.Government savings certificates (GSCs) range in maturity from three to
eight years. GSCs are offered to different types of investors in the retail sector
 (but small corporates are allowed to invest). The types of investors are mostly
individuals and families but also include charity and provident funds. GSCs are
issued in series through the year. The holder may redeem them at par at any
time.

Section 3-Overview of The Situation

Problems:

Numerous factors in Bangladesh today suggest that Bangladesh will not be able
to develop an active, local–currency fixed–income market. Economic and
financial transactions are highly regulated, and the economy does not provide a
sufficient number of appropriately structured and skilled issuers and investors.
Although the government has recently began privatizing selected state-owned
companies and deregulating the financial market, progress has been slow,
leaving financial market participants skeptical about whether the government can
succeed in this endeavor.
Bangladesh finds it difficult to move forward for several reasons:
 weak governance at the institutional and market levels
 high nonperforming assets among the nationalized commercial banks (NCBs)
 poorly defined and overlapping responsibilities of the Bangladesh Bank,
Securities and Exchange Commission, and Ministry of Finance
 and the lack of incentives and private initiative to drive market developments.

These four problems are the principal obstacles to the development of bond and
debenture markets in Bangladesh. The government is aware of them, and the
World Bank and other organizations have been pushing for solutions. However,
change is slow.

Major Impediments to Bond and Debenture Market Development

The obstacles to bond market development can be divided into two broad
categories: those around and across the market, and those inside the fixed-
income markets.
Around and Across the Market:

The obstacles in this group stem from the political situation, the macroeconomic
situation, and the broader financial system.

The Political Situation:

Nationwide program of strikes, processions, and mass meetings by political

parties have weakened the government’s intentions to foster changes such as
the development of the financial market.

In addition, certain commercial and financial regulations are outdated.

Governance and accountability are lacking in certain areas, and inefficiency is
present in the financial system, mainly concerning the state-owned banking
sector. The problems created by these weak institutions are compounded by an
increasingly confrontational political environment. Because the political
environment is very fragile, laws and regulations are not being fully
enforced. Although the government is aware of these problems, it has been slow
to improve governance and develop strong institutional capacity.

Macroeconomic Situation:

The consolidated public sector deficit, taking into account losses incurred by
state-owned enterprises, is much higher and underscores the need for improved
fiscal management; however, a sense of urgency is missing in policymaking,
despite the growing imbalances in the economy and crowding out as Bangladesh
continues to channel vast monetary resources into servicing bad loans. Given
that macroeconomic changes can happen in short periods of time and that
nonperforming loans, which account for a third of the loan portfolio, can create
financial sector vulnerability, the bad-loan situation could trigger a severe liquidity
crisis nationwide. It can take decades to build a fixed-income market in the wake
of such crises. This issue clearly needs immediate and focused attention.
Broader Laws and Regulations:

Certain omissions or drawbacks of the broader laws and regulations directly

affect development of the fixed-income market. First, with regard to the
ownership of land, the law provides for the registration of deeds rather than of
ownership, which makes it impossible to take land as collateral for bond
issuance. Second, the law makes arbitration a cumbersome and slow process;
moreover, foreign arbitration awards are not enforceable in Bangladesh. Third, in
terms of obtaining issuers, there is no privatization law to lend transparency and
authority to the privatization process, although one is at present being drafted.
Fourth, Bangladesh’s laws represent a mixture of codified British common law
and legal principles from various religious heritages. So, Bangladesh courts are
limited in their ability to function effectively. Contract laws and commercial codes
seem to be fair, but ensuring that they are observed is difficult because of a weak
adjudication system.

Broader Financial System:

The broader financial system includes the banking sector, nonbanking sector,
government securities market, and short-term money markets.

Banking sector. Bangladesh’s banking system, which is dominated by state-

owned NCBs, creates two serious problems for a local corporate bond market.
First, the system provides low-cost loans to state owned enterprises, which
account for a large part of the corporate sector. This undermines development of
the corporate bond market because other financial institutions are unable to
compete with these ―underpriced loans.‖ Indeed, the state-owned enterprises
constitute a large part of the NCBs’ business. To complicate matters,
development financial institutions (DFIs) also provide low-cost loans, priced at a
small percentage over bank deposits for similar maturities. Second, the banking
sector is faced with a substantial number of bad loans; nonperforming assets
account for about 30% of total assets.
Nonbanking sector. The nonbanking portion of the financial sector consists of two
small stock exchanges (Dhaka and Chittagong), both of which have still not
recovered from the bull market problems of 1996, which left the public suspicious
of corporate institutions because it is hard to get them to disclose their figures.
The weak operating performance by listed companies and low confidence in the
market overall has made it difficult for the market to recover. In sum, the
nonbanking sector has not evolved in a way that would allow it to play an active
role in the financial system. Nor is it prepared to play an active and skilled
leadership role in developing and participating in an active fixed income market.

Government securities market:

GSC issuances offer significantly higher rates than local bank deposits, which
create a relatively high rate for risk-free and tax-free government securities. This
establishes a disincentive to invest in corporate securities. GSCs create a high
benchmark interest rate foundation for corporate securities. That matters
because it is very hard to compete with risk-free government debt. At present,
Bangladesh law and the government’s fiscal and monetary policy combine to
create a financial market monopoly for GSCs and NCBs, which in turn keeps
alternate financial intermediation from emerging.

Short-term money markets:

Money markets provide another foundation for bond markets. The money
markets in Bangladesh are quite small. There is an interbank market, in which
commercial banks borrow and lend to adjust their short. Normal maturities range
from overnight to 30 days. Bangladesh also has a forward market for U.S. dollars
against the taka, but only for short maturities. There is no commercial paper
market. This weak form of short-term money market also hinders the
development of a strong bond debenture market.
Future Prospects

Bangladesh is one of the poorest countries in the world, with approximately 140
million inhabitants, of which about 50% live below the poverty line. Although its
GNP growth rates—in the range of 4%–5% year—are attractive, they suggest
that it will take Bangladesh 25 years to double its per capita income. In order to
reduce the incidence of poverty to about 11%, as it hopes to do, Bangladesh will
have to achieve economic growth rates of 7.5% or more a year. According to
several studies (see, for example, World Bank, ―Bangladesh, Key Challenges for
the Next Millennium,‖ April 1999), economy has the capacity to move out of
poverty with increasing speed, but that will require decisive policy actions in
several areas, not least of which is the financial market.

In the past few years, there has been a number of significant changes in
Bangladesh economy. The RMG sector has survived and taken quite a strong
position after removal of quotas. Jute industries have a new life and jute goods
export have increased. Tea, leather and other industries are also in good shape
now. Foreign remittance has increased significantly. Despite political violence,
overall production and exports are stable yet. If major exporting industries get
into financial market, then there would be a good chance for creating a strong
bond and debenture market.

Also within the country, a wide class of new entrepreneurs has evolved and there
are many new business firms operating. Growth have been very high in telecom
and power (especially gas) sector. Current money market and govt. banks do not
have enough funds to support all these firms. There would be a better scenario if
these firms get in the market by issuing stocks, bonds and debentures. Recently,
the govt. has made some new regulation that requires large firms to issue
securities in the financial sector. These regulations will certainly help improve our
financial market, especially bond and debenture market.
If the country’s positive macroeconomic trends continue into the future, the fiscal
deficit and bad-loan situation will ease up and these factors would pose less
threat to the financial market

Again, the government has committed itself to launching financial reforms that
could help accelerate the country’s rate of growth. The main goal of these
reforms is to reduce the direct controls on the financial system, and to deregulate
and introduce a new set of market-oriented approaches to financial sector
activity.

Green Bond
What Is a Green Bond?
A green bond is a type of fixed-income instrument that is specifically earmarked
to raise money for climate and environmental projects. These bonds are typically
asset-linked and backed by the issuing entity's balance sheet, so they usually
carry the same credit rating as their issuers’ other debt obligations.
Dating back to the first decade of the 21st century, green bonds are also referred
to as climate bonds.

KEY TAKEAWAYS
-income instrument designed specifically to support
specific climate-related or environmental projects.
n bonds typically come with tax incentives to enhance their
attractiveness to investors.

Understanding Green Bonds

Green bonds are designated bonds intended to encourage sustainability and to
support climate-related or other types of special environmental projects. More
specifically, green bonds finance projects aimed at energy efficiency, pollution
prevention, sustainable agriculture, fishery and forestry, the protection of aquatic
and terrestrial ecosystems, clean transportation, clean water, and sustainable
water management. They also finance the cultivation of environmentally friendly
technologies and the mitigation of climate change.
Green bonds come with tax incentives such as tax exemption and tax credits,
making them a more attractive investment compared to a comparable taxable
bond. These tax advantages provide a monetary incentive to tackle prominent
social issues such as climate change and a movement to renewable sources of
energy. To qualify for green bond status, they are often verified by a third party
such as the Climate Bond Standard Board, which certifies that the bond will fund
projects that include benefits to the environment.
History of Green Bonds
As recently as 2012, green bond issuance amounted only to $2.6 billion. But in
2016, green bonds began to sprout. Much of the action was attributable to
Chinese borrowers, who accounted for $32.9 billion of the total, or more than a

third of all issuances. But the interest is global, with the European Union and the
United States among the leaders too.
In 2017, green bond issuance soared to a record high, accounting for $161 billion
worth of investment worldwide, according to the latest report from the rating
agency Moody's. Growth slowed a bit in 2018, hitting only $167 billion, 1 but
rebounded the following year. Moody's estimates that global issuances in
2019,
when finally tabulated, could top $250 billion. 2 The Climate Bonds Initiative, an
international, investor-focused not-for-profit organization, puts the figure at
$257.5 billion. 3
2009
The year the World Bank issued the first so-labeled green bond for institutional
investors.
The 2010s saw the development of green bond funds, broadening the ability of
retail investors to participate in these initiatives. Allianz SE, Axa SA, State Street
Corporation, TIAA-CREF, Blackrock, ax World Funds, and HSBC are among the
investment companies and asset management firms that have sponsored green
bond mutual funds or ETFs.
Real-World Example of Green Bonds
The World Bank is a major issuer of green bonds. While it finances projects
around the world, the institution has been very active especially in the United
States, where its issuances have totaled US $5.3 million between FY 2014 and
FY 2018. 4
and in India, where its issuances total over 2.7 billion rupees.
In the latter country, one of the bank's oldest ventures has been the Rampur
Hydropower Project, which aims to provide low-carbon hydroelectric power to
northern India's electricity grid. It produces 1,957,000 megawatts annually,
saving 1,407,700 tons of carbon dioxide emissions a year.

Bangladesh has potential for green bond market

The International Finance Corporation (IFC) considers Bangladesh to be a
potential green bond market, from where the government and private
companies could raise long-term funds to invest in environment-friendly
projects.
IFC, a part of the World Bank Group, published the findings in a study titled
"Green Bonds Development in Bangladesh - A Market Landscape,"
released
recently. IFC prepared the report in partnership with the Bangladesh Bank.
The study shows that Bangladesh requires an additional $233 billion in
infrastructure investment between 2016 and 2040 to meet the targets of the
sustainable development goals. So, these funds can be raised through
developing green bonds.
According to IFC, large corporates, banks and non-bank financial institutions
in the country can be potential investors in green projects through these
bonds.
Some large corporates that have a healthy asset size can invest in green
bonds. They are: Akij Group, AK Khan Group, Grameen Telecom Trust,
Square Pharmaceuticals, Metlife, Green Delta Insurance Company, LR Global
AMC, VIPB AMC, LankaBangla Finance, The City Bank and BRAC Bank.
It also said the local banks and financial institutions have high potential to
invest in green bonds.
Officials of the Bangladesh Bank have stressed on developing green bonds in
the country because they are becoming popular with environmentally-aware
investors.
The green bond market has grown significantly since the first climate
awareness bond was issued in 2007 by the European Investment Bank, and
the first explicitly labelled green bond was issued in 2008 by the World Bank.
In 2014, green bonds accounted for $37 billion globally. In just 4 years, this
has grown to $168 billion.
$123 billion worth of green bonds were already issued globally by the
beginning of July 2019, in line with the Climate Bonds Initiative annual
issuance target of $250 billion.

But the bond market has been untapped in Bangladesh for years. Investors,
mainly institutions, put their money in treasury bonds and bills. They have also
put their money in a few private bonds like subordinated bonds and
commercial papers. In 2018, 17 local banks issued Tk9,600 crore worth of
subordinated bonds privately, to meet their capital needs. But the green bond
has not been introduced in this country yet.
Khondkar Morshed Millat, general manager of the Sustainable Finance
Department of Bangladesh Bank told The Business Standard that first it is
necessary to make concerned regulatory agencies aware of the benefits of
green bonds.
He said initially public-private partnership projects can raise funds through
green bonds.
The World Bank is a major issuer of green bonds. While it finances projects
around the world, the institution has been very active in the United States,
where it issued $5.3 million worth of green bonds between FY 2014 and FY
2018, and in India where it has issued over 2.7 billion Rupees worth of green
bonds.
In India, one of the bank's oldest ventures is the Rampur Hydropower Project,
which aims to provide low-carbon hydroelectric power to northern India's
electricity grid. It will be able to produce 1,957,000 megawatts annually,
saving 1,407,700 tons of carbon dioxide emissions a year.
Green bonds offer investors and issuers a product dedicated to raising finance
for sustainable projects. The term 'green bonds' refers to bonds that
exclusively finance low carbon and climate-resilient projects.
But there are some potential barriers towards the development of a bond
market. These are: High transaction cost, poor access to investors, unclear
project pipeline and huge tax and regulatory barriers.
Also, local investors face competition with other fixed income products,
competition with non-green projects, poor credit rating and management
capacity and regulatory restrictions. Foreign investors also cite the barriers
caused by excessive currency and country risk, unclear green impact and little
verification.
 Recommendations:

Bangladesh will eventually need an efficient capital & debt market that can
mobilize domestic and foreign resources for investment. For the time
being, however, Bangladesh should focus on creating a well-organized,
regulated, and attractive primary market in both public and private placements.
For this, Bangladesh needs a healthy non-bank financial institution (NBFI) sector
to increase mobilization and make competitive financing available in a fixed-
income market. To achieve that end, it must break the NCBs’ monopoly.
Although the government is aware of this problem and has put forward some
relevant reforms, there are no real incentives to speed up the process, maybe
because of political considerations.

We also believe that the following steps are also necessary for development of a
strong bond and debenture market in Bangladesh-

 Political problems should be minimized

 Laws and regulations must be updated
 Governance and accountability should be improved
 Weaknesses in the financial system should be removed
 Bad loan problem must be solved
 Large corporations should be encouraged to use financial market for funding
 GSC and NCB’s monopoly should be stopped
 Firms in the high growth industries, like telecom industries, should be brought
into the financial market
 The money market should be improved to assist in developing a strong bond and
debenture market.
Our overview

In our study, we have seen that although there are a few bonds and debentures
in our country, the market is very weak. This is due to problems in the political,
macroeconomic and financial system and weakness in decision-making, law
enforcement and financial market. Lack of sufficient information is another cause.

In spite of this situation, we have also seen that Bangladesh has a good
prospect. If govt. acts properly and makes accurate decisions, and the
suggestions mentioned above are implemented properly, then more firms will be
encouraged to issue stocks, bonds, and debentures. This will certainly help to
improve a strong market for bonds and debentures.

So, we hope that, the current problems that are hindering the development of
bond and debenture market should be removed soon so that the overall financial
market improves. Only Then we can hope for a sound financial system in our
country that should help economy to improve. For this, it is the government who
should take steps forward. Fortunately, currently govt. is taking initiatives to
improve the financial market. So we believe we can expect for a well-organized
strong bond and debenture market in the upcoming future in our country.

Special Thanks to
BICM (Bangladesh Institute of Capital Market)
&
Faculty : Sagira Sultana Provaty
Lecturer, BICM