Presentation Slides For The IFFC Conference in Kuala Lumpur - Oct 2008

Pricing Mechanism For Sukuk
And Bond Structures
Malaysia’s First Bond Pricing Agency

Meor Amri Meor Ayob
©Copyright BOND PRICING AGENCY MALAYSIA SDN.BHD. (FORMERLY BONDWEB MALAYSIA SDN BHD) - All rights
reserved.
Bond Market Growth in Malaysia
The Malaysian bond market has seen tremendous growth over the past years
 Private Debt Securities (PDS)
emerged
as the largest source of private
sector
financing in the aftermath of the
1997
financial crisis
It was reported that Malaysia’s

Islamic bond market grew over 80%
over the last 5 years, with a 96% y-o-
y growth in long term PDS market for
the year 2007
96% y-o-
y Malaysia accounts for two thirds of
growth
in global Islamic bonds outstanding in
Islamic
PDS
2007
Binariang GSM’s Senior Islamic bond
issuance worth RM20 billion is the

largest corporate bond issue in
Malaysia
yet
* Long term PDS are notes that are above 1 year in tenure and would naturally exclude commercial papers, BNM notes, repos and other related papers
©Copyright BOND PRICING AGENCY MALAYSIA SDN.BHD (FORMERLY BONDWEB MALAYSIA SDN BHD). - All rights
Activity in the secondary market has been consistent
Despite the growth in bond
issuances, liquidity and activity in
the
secondary market has not grown in
tandem
Liquidity has been observed to be

active
for better credit quality papers
Key issue in the lack of liquidity is

price and information transparency
A number of Islamic concepts have been applied in the structuring of Islamic
bonds  Islamic concepts applied in various
bonds :
Al Bai Bithaman Ajil
Al Qardhul Hasan
Bai' Bi Al-Taqsit
Bai Dayn
Bai Dayn & Murabahah
Bai-Al-Einah
Ijarah
Istisna
Mudharabah
Murabahah
Musyarakah
 Combinations include:
Al Bai Bithaman Ajil & Bai
Einah
Mudharabah & Murabahah
Murabahah & Bai Al Dayn
Murabahah & Musyarakah
Murabahah & Ijarah
Istisna & Mudharabah
The Role of Bond Pricing
The Solution
Problem The BPA evaluates about 2,000+ bonds that

Less than 1% are traded, where are the are not traded on any given day, based on the
prices for the remaining 99%? market prices
The BPA needs to employ reliable database

and evaluation methodology. This
The Need
methodology MUST be transparent and
Daily valuation of bond portfolios for NAV
consistent
calculation and portfolio valuation
Current method
Quotes from brokers or banks, a few via
internally generated models – bias?
Benefits of Bond Pricing for the Bond Market
BPA valuation approved by the SC may revitalize the bond market using mark-to-market
Revitalizing the prices as benchmark by publicly announcing them
Secondary Marking-to-market system provide strategy alternatives to traditional hold-to-maturity
Market for Bonds strategies.
From an origination and underwriting perspective, primary level pricing becomes

Revitalizing the challenging especially for lower credits
Primary Market Mark-to-market pricing on previously issued corporate bonds can promote new corporate
for Bonds bond issues by functioning as benchmarks for primary level pricing
BPA’s transparency in the methodologies being used will spur the evolution of the bond
Promoting New market with further advance pricing methodologies
Product When advance pricing methodologies are established, it will encourage more bond
Development offerings and more active trading of these products in the secondary market.
Providing price discovery may assist in financial institutions' compliance to international

Improving the
Soundness of standards such as IAS 39 and Basel II requirements.
Effectiveness of risk management will be further enhanced as the valuation process will
Financial
Institutions be consistent and not arbitrary
Delivery Channels
For 2000+ stocks delivered via a .csv (excel) file daily at 6.00 pm
BOND CODE ISIN CODE BOND NAME VALUE DATE MTM PRICE MTM YIELD LAST PRICE LAST YIELD LAST DATE DURATIONCONVEXITY
MO060001 MYBMO0600019 MGS 1/2006 4.262% 15.09.2016 17-Jan-07 103.89 3.78 103.85 3.78 16-Jan-07 7.79 72.77
MS03001S MYBMS03001S9 MGS 1/2003 4.41000% 29.01.2018 17-Jan-07 105.42 3.8 0 0 8.58 89.86
MS03002H MYBMS03002H0 MGS 2/2003 4.24000% 07.02.2018 17-Jan-07 103.9 3.8 0 0 8.66 91.06
MZ98005A MYBMZ98005A5 MGS 5/1998 8.000% 20Y 30102018 17-Jan-07 139.47 3.81 0 0 8.23 87.15
MS04003H MYBMS04003H7 MGS 3/2004 5.734% 30.07.2019 17-Jan-07 118.76 3.84 118 3.91 11-Dec-06 9.04 103.67
MY050003 MYBMY0500036 MGS 3/2005 4.837% 15.07.2025 17-Jan-07 110.58 4.02 110.59 4.02 10-Jan-07 12.43 199.78
MX060002 MYBMX0600028 MGS 2/2006 4.709% 15.09.2026 17-Jan-07 108.74 4.06 108.75 4.06 16-Jan-07 12.78 216.26
DE060266 MYBDE0602668 CAGN 1/2006 364D 25.05.2007 17-Jan-07 98.7 3.76 98.65 3.76 12-Jan-07 0.35 0.24
KV96101E MYBKV96101E2 KLIA 0.000% 30.01.2016 PN 17-Jan-07 128.29 3.99 128.27 3.99 15-Jan-07 6.65 56.4
PS93004H MYBPS93004H4 YTL POWER 10.000% 30.10.2008 PN 17-Jan-07 110.58 3.82 0 0 1.64 3.61
KV95001T MYBKV95001T3 KLIA 7.750% 17.01.2015 PN 17-Jan-07 126.63 3.85 121.06 5.45 04-Mar-02 6.21 47.52
GG04001F MYBGG04001F7 GII 1/2004 0.00000% 15.06.2007 17-Jan-07 98.62 3.43 98.42 3.7 08-Jan-07 0.4 0.32
GI03001W MYBGI03001W1 GII 1/2003 0.00000% 31.03.2008 17-Jan-07 95.84 3.57 95.35 3.61 27-Nov-06 1.18 1.98
GI04003N MYBGI04003N5 GII 3/2004 0.00000% 29.10.2009 17-Jan-07 90.4 3.66 86.93 4.15 24-May-06 2.73 8.81
GK04002F MYBGK04002F9 GII 2/2004 0.00000% 30.09.2011 17-Jan-07 84.1 3.72 83.85 3.71 14-Dec-06 4.62 23.6
CI02014T MYBCI02014T5 SMC 14/2002 23.04.2007 17-Jan-07 100.13 3.62 99.25 4.82 28-Dec-05 0.26 0.14
CI02025A MYBCI02025A1 SMC 25/2002 22.08.2007 17-Jan-07 100.14 3.68 100.05 3.98 04-Oct-02 0.57 0.62
CI03007S MYBCI03007S0 SMC 7/2003 11.04.2008 17-Jan-07 99.67 3.78 99.7 3.73 01-Dec-06 1.18 2.01
CK02006N MYBCK02006N0 SMC 6/2002 26.02.2009 17-Jan-07 101.2 3.82 99.91 4.45 28-Dec-05 1.97 4.99
DN97062W MYBDN97062W6 PERWAJA 0.000% 31.07.2007 PN 17-Jan-07 102.5 3.52 107.47 3.59 29-Nov-05 0.51 0.52
DN97099H MYBDN97099H9 TENAGA 0.000% 01.10.2007 PN 17-Jan-07 102.86 3.81 103.73 3.81 30-Oct-06 0.67 0.79
DS97120S MYBDS97120S5 TENAGA 0.000% 01.10.2012 PN 17-Jan-07 119.85 4.33 119.63 4.74 04-Apr-06 4.57 25.99
QK00001W MYBQK00001W8 KHA1/00 1.02B 0-CP 7YR 20/3/2007 17-Jan-07 99.4 3.57 98.41 3.65 10-Oct-06 0.17 0.06
QI03001A MYBQI03001A5 KHA1/03 1B 0-CP 5Y 18/6/08 17-Jan-07 94.96 3.68 93.87 3.8 11-Oct-06 1.39 2.63
What Is A Bond Pricing Agency
BPAs are new entities and currently only three countries use the BPA framework
Korea
Thailand
Mexico Egypt (in
development) Malaysia
Indonesia (in
development)
Mexico Malaysia Thailand Korea

Two price vendors Bondweb Malaysia Sdn Bhd Thai Bond Market Association Korea Bond Pricing
under the purview of (SRO) KIS Pricing, Inc
Banco De Mexico NICE Pricing Services, Inc
Bond Pricing Regulations
BPA Registration Requirements
As per SC Guidelines on the Registration of Bond Pricing Agencies dated 25 January 2006 -
strict requirements to qualify covering:
Methodology and Process : Audited

Pricing performance : 3 month market acceptance test
Expertise : Fit and proper persons
System: Adequate security and backup
Shareholders : No controlling party
Minimum paid up capital : RM 10 million
Professional indemnity insurance : RM 10 million
Bond Pricing Agency Malaysia has met and exceeded these requirements, and was appointed
as the first registered Bond Pricing Agency on 18th April 2006
The Nature of Bond Pricing Business
Introducing Bond Pricing Agency Malaysia Sdn Bhd
Bond Pricing Agency Malaysia Sdn Bhd (BPAM) was established in 2004
 With participation from:

MARC and RAM on data and technical
support
SC and BNM in observer and advisory role
Market community (buy/sell side, brokers)
via
“Bottom Up” approach
 Adhered to strict SC requirements to qualify as

BPA:
Audited methodology and process
Three months market acceptance test
RM10 million minimum paid up capital and
professional indemnity insurance
No controlling shareholders
Compliance and Quality Assurance
• Bond Pricing Agency Malaysia (BPAM) is currently the only registered Bond Pricing
Agency (BPA) with the Securities Commission
• BPAM meets and exceeds the requirements set out in the Guidelines on the
Registration of Bond Pricing Agencies dated 25 January 2006
The Securities Commission issued Guidance Note 15 dated 15 December 2006 pursuant to the
Guidelines on Unit Trusts Funds, which outlined the policy for Unit Trusts on use of BPA prices:
“Funds investing in Ringgit-denominated bonds shall value bond portfolios on daily basis using
fair value prices quoted by a Bond Pricing Agency (BPA) registered with the SC. “
• BPAM is already supporting the implementation of the Basel II, IAS 39 and Risk Based
Capital requirement for banks and insurance companies
• Therefore, BPAM is fully compliant to meet the needs of Unit Trust Management
Companies, Asset Managers and Financial Institutions with regard to the provision of
Fair Value Bond Prices
BPAM Clients
BPAM Clients
Pricing Process
BPAM’s Bond Pricing Services
 BPAM provides valuations on a daily basis at INDIVIDUAL bond level

 A comprehensive data collection, validation, pricing and dissemination process is in place to
ensure consistent and market neutral valuations
 The bond pricing process is transparent and uses global standard pricing models
 The models are customized to meet the unique needs of the Malaysian market
 BPAM prices unlisted MYR bonds (Conventional and Islamic). For now we do not price short
term papers, unrated bonds, loan stocks and listed bonds
 We incorporate a market feedback mechanism in the event where there are disputes or queries
on the prices
 Intimate local knowledge of the instruments and market structure is vital to ensure credibility of
the BPA
Pricing Methodology
Bond Pricing Approach – Current Industry Practice and the Assumptions
Four common market practices are used in conducting bond pricing.

YTM Matrix / BPAM employs the hybrid approach
Curve Pricing
Approach Type Pricing Method Granularity
YTM Matrix / Curve Quote Driven Curve Pricing
Pricing
Individual
Quotation Individual Quotation Quote Driven Individual Bond
Approach
Approach
Model Approach Theoretical Individual Bond
Model
Approach Hybrid Approach Hybrid Individual Bond
(Mark To
Model)
Hybrid
Approach
Pricing Methodology
BPAM’s Pricing Methodology – An Overview
Bond Price = f ( Benchmark Rates + Credit Spread )
Y Derivation of benchmark rate

i
Risk
e Liquidity
l Credit Risk
d Risk
Term to Maturity
Segmentation Cube
Quotations
Individual Bonds
Measuring the
Market Price
Trades Of Risk
Individual Bond
Valuation
Pricing Process
Price All Bonds
Pricing for un-traded or rarely traded bonds
 Obtain a base spread from the past real
transaction data
 Track the change of spread over time Y
 Estimate the spread of the bond relative to i
changes in the yield curves and other peer group
e
l
d Yield curve(AA)
20bp Spread(AA)
Evaluation Yield Real Transaction
20bp Spread of specific bond

15bp Base yield curve
(AAA)
15bp
a te Term
onD to M
ati a turit
alu y
Ev
Pricing Methodology
Bond types identified and priced by BPAM in the MYR market:
 Callable Amortizing Bonds with Secondary Notes  Callable Stepping Bonds
 Discount Bonds  Callable Stepping Amortizing Bonds
 Bullet Bonds  Convertible Stepping Bonds
 Fixed Rate Bonds  Callable Bonds with Secondary Notes
 Amortizing Bonds  Convertible Bonds with Secondary Notes
 Callable Bonds
 Convertible Bonds
 Exchange Bonds
 Bond with Warrants As of April 2008:
 Fixed Rate ABS
 Callable ABS Total stocks in the market: 2693
 Fixed Rate MBS Priced by BPAM: 1908
 Callable MBS
 Stepping FRB
 Floating Rate Notes
 Floating Amortizing Notes
 Floating Rate ABS
 Floating Rate MBS
 Bond with Secondary Notes
 Amortizing Bonds with Secondary Notes
 Callable Amortizing Bonds
 Stepping Amortizing Bonds
Pricing Methodology
Price All Bonds
Apply relevant bond type price formula Notation Descriptions

f Coupon payment frequency in a
Eg1 : Fixed coupon bonds with regular period c year
Coupon rate
c 1 F Face amount = Notional
n
×F× y Yield *
100 f F
∑
k =1 (1 +
y 1 ( k −1+ D 2 )
+
y 1 ( n −1+ D 2 )
− AI AI
D
Accrued Interest
No. of days in one regular coupon
× ) D
(1 + × ) D
period
100 f 100 f
D2 No. of days between the value
date and the next coupon Date
Eg2 : Fixed coupon bonds with short first coupon n Last coupon period
E/U No. of days between the pseudo
c 1 FIF c 1 issue / real last coupon date and
×F × × n
×F ×
100 f E 100 f F the real first coupon / pseudo
+∑ + − AI maturity date (short first / last
y 1 D 2 y 1 ( k −1+ E )
D 2 y 1 ( n −1+ D 2 E )
(1 + × ) E k =2
(1 + × ) (1 + × ) coupon)
100 f 100 f 100 f
No. of days between the pseudo
issue / pseudo last coupon date
Eg3 : Fixed coupon bonds long first coupon and the pseudo first coupon /
c 1 c 1 LIF FIF / LIF pseudo
No. maturity
of days datethe
between (long
realfirst
issue
n −1
×F× ×F× × coupon)
date / real last coupon and the real
100 f 100 f U F
∑ y 1 ( k −1+ D )
D 2
+ LIF
y 1 ( n−1+ U + D 2U )
+
y
LIF
1 ( n −1+ U + D 2U )
− AI first coupon / real maturity date
k =1
(1 + × ) (Short First / Last Coupon Bond)
(1 + × ) (1 + × )
100 f 100 f 100 f
No. of days between the real issue
/ pseudo last coupon date and the
* Price computed using yield derived from the pseudo first coupon / real maturity
(credit spot rate at discount period t + individual spread) date (Long First / Last Coupon
Bond)
Bond Pricing, Current Practice and Pricing Issue
Sophisticated pricing methodologies are not used due to the lack of transparent
data. Advanced pricing methodologies are still in primitive development.
Example: Pricing of option embedded bonds – current practice
I I I Interest
Payment
P P Principle
I I I I P
Payment
First Call Legal

Date Maturity
c 1
n'
×F×
100 f F
P=∑ + − AI
y 1 ( k −1+ D 2 D ) y 1 ( n ' −1+ D 2 )
k =1
(1 + × ) (1 + × ) D
100 f 100 f
where n' = first call date
 Current market practice is to price option embedded bonds to the first call
 Cash flow after first call is discarded
 Assumption is flawed
 There are also no difference in pricing of American, European and Bermudan option
Theoretical Method in Pricing of Bonds with Embedded Options
Example: Pricing of option embedded bonds – One Factor Hull & White Trinomial Tree
1) The price of option embedded bond can be computed by backwardation through an interest rate
tree as follows:
At time T, the non-exercise price can be computed by:
P(T+1;up)
Pnon − exer (T ) = exp(− r × ∆t ) × [ P(T + 1; up ) * prob(up )
+ P (T + 1; mid ) * prob(mid )
+ P (T + 1; dw) * prob(dw)]
P(T) P(T+1;mid)
If the option is call and the exercise price at T is C, then the

price of option bond at T can be determined as follows:
P(T+1;dw)
P(T) = min [ C,Pnon−exer (T ) ]
So, the price of option embedded bond is P(0).
1) Hull and White suggested a two-stage method to generate the interest rate tree using the basic
formula: dr = [θ (t ) − ar ]dt + σdz
θ (t )
a
: the coefficient of long term mean
: meanσspeed
: the volatility of short term interest rate
7 a 2 j 2 ∆t 2 − 3aj∆t
Pu = +Tree
Example: Pricing of option embedded bonds – One Factor Hull & White Trinomial6 2
1
1) Hull and White suggested a two-stage method to generate the interest rate tree.Pm = − 3 − a j 2 ∆t 2 + 2aj∆t
2
1 a 2 j 2 ∆t 2 − aj∆t
a) The first stage in building a tree for this model is to build a tree for a Pd = +
6 2
r*
variable that is initially zero following
the processdr = −ar dt + σdz
* *
.
1 a 2 j 2 ∆t 2 − aj∆t
Pu = +
6 2
2
Pm = − a 2 j 2 ∆t 2
3
1 a 2 j 2 ∆t 2 + aj∆t
Pd = +
6 2
Assumption:θ (t ) = 0 r (,0) = 0
First Stage Model: dr * = −ar * dt + σdz 1 a 2 j 2 ∆t 2 + aj∆t
Pu = +
∆R * = σ 3∆t t = i∆t R = j∆, R
* 6 2
Parameter Setting: , 1
0.184 0.816 Pm = − − a 2 j 2 ∆t 2 − 2aj∆t
j max
and j min = −, j max
3
: Minimum integer between
a∆t a∆ t 7 a 2 j 2 ∆t 2 + 3aj∆t
Pd = +
6 2
Tree expansion: If the short-term interest reaches the two boundaries
j max j min
or goes down , then the probabilities to up, Pmiddle,
u , Pm , Pd down ( ) will change.
Example: Pricing of option embedded bonds – One Factor Hull & White Trinomial Tree
1) Hull and White suggested a two-stage method to generate the interest rate tree.
r * tree
b) The second stage in the tree construction is to convert the into a tree for r . This is
*
r the nodes on the
accomplished by displacing -tree so that the initial term structure is exactly
i∆t interest rates on r-tree at time
matched. The approach is to set the r * to the
to be equal
α (i∆t )
corresponding interest rates on -tree plus α
while keeping the probabilities the same. The procedure is to calculate s iteratively so
that theα (initial
Define t ) = r (tterm α (t )is= [matched.
) − r * (tstructure
) d θ (t ) − aα (t )]dt
α can be calculated as follows:
0 , 0 = 1( α 0
Qi , j : Present value of security, which gives $1 at (i,j) Qnode ), ∆t = initial -period
interest rate,
Q
given
k
∑ Qterm
i +1, j = by j ) exp[−(α i + k∆R )∆t ]
i , k p ( k ,structure)
p(k , j ) Pu , Pm , Pd
where ln ∑
: transition probability from
− j∆R∆t
Qi , j enode −(i,k)
ln Pi +to
1 node (i+1,j) ( )
Pi +1 = ∑ Qi , j exp[−(α i + j∆R)∆t ] αi = j
j ∆t

where P is the price computed from the current term structure of interest rate
Bond Pricing, Current Practice and Pricing
Issues - Islamic
Valuation method of Sukuks are indifferent to conventional bonds in market
practice.
Syariah principles conformed via product Conventional valuation formula used
structuring
Fixed Payment Bond Fixed Payment Bond Formula
Conventional c 1
n
×F×
100 f F
I I Interest
P=∑ + − Accrued Interest
y 1 ( k −1+ D )
D 2 y 1 ( n −1+ D 2 D )
Payment k =1
(1 + × ) (1 + × )
100 f 100 f
P Principle
I I P
Payment
Notatio Descriptions
fn Payment frequency in a year
c Cash flow rate
F Face amount = Notional
Islamic y Yield
D No. of days in one regular coupon period
SN D2 No. of days between the value date and the next
n payment
Last payment
date period
P Clean Price
SN
 Secondary Note in Islamic structure acts as the fixed profit
SN payment as agreed in the contract.
SN Secondary
Note  Cash flow rate in Islamic structure derived as the ratio between
PN Primary
the secondary note amount and the primary note amount
PN
Note
 Primary amount is the face amount
Bond Pricing, Current Practice and Pricing Issues - Islamic
Islamic and conventional bonds are fundamentally different in both structure and
thus valuation
Islamic Bond Differences from Conventional Bonds Many more
unaccounted Islamic
 Not an exchange of paper or money but an features in current
exchange of Syariah approved assets market valuation
 In principle, Islamic bond structure is similar to asset

securitisation  Inclusion of asset volatility
 Differing market perception resulting in
 Term structure of asset
differentiated trading behaviour – liquidity, risk
premium, etc.  Floating rate mechanism for the forward
rate agreement in the unconditional and
 No imposition of interest but uses secondary notes
irrevocable purchase of asset at
as profit payments
maturity
 Profit earned through financial consideration for the
 Prepayment risk modeling
exchange by applying Syariah principles
 Counterparty risk modeling
 Additional risks that are uncommon in conventional
bonds such as religious and regulatory risks
Rather than relying on the performance of the underlying assets, Islamic bonds
are currently priced as per their conventional counterparts and almost
arbitrarily.
Example – KL Sentral Sdn Bhd (KLSSB) Musyarakah Venture with Kuwait Finance
House (KFH) as option writer
Market prices KLSSB as a
Investor fixed payment bond to legal
maturity disregarding asset
s issues.
KLSSB Proceeds
 Trustee
issues from PU for Truste overseeing the
Sukuk and Sukuk
receives
1 5 redemption
e Musyarakah Bond has pricing issue on asset pricing
proceeds in and profit Cashflow payments in
return payments arrears via aggregated
project revenue
Unconditional and irrevocable
purchase of assets

Musyarakah KLSSB KLSSB Put KFH  Forward pricing of assets require a forward rate
partners (as Wakeel to Option benchmark of asset class
appoint
Investors)  Consideration must be taken for counterparty
KLSSB as  Put
risk at the end of the contract
the Project 4 Option
Agent terms
Purchase Undertaking and Bond has pricing issue on asset’s embedded
(PU) condition option IHH
s
Distributable profit to be Stake of Musyarakah IH
shared semi-annually partners based on their IHL
based on an agreed 3 2 capital contribution of I0
profit sharing ration of
99%:1% to KLSSB and
74:26 from KLSSB (in
kind) and Sukukholders IL
ILH
….
Sukukholders (cash) ILL
 Asset volatility and term structure of asset
Musyarakah Venture to sell class.
Project Lands Eg equity industry index volatility
 Asset data greatly needed
 Optionality of the put/call feature
In asset pricing, many considerations must be taken in the cash flow structure and
risk exposure
Cash Flow
Sale Lease Equity
Price Delivery Payment Price Delivery Payment Price Payment
 Discount   Advance  Discount   Advance  Discount  Advance

 Immediate  Immediate
 Staggered  Staggered   Staggered
 Deferred End of  Deferred End of End of
Negotiated End of Negotiated End of Negotiated
 Mark up Period  Mark up Period Period
 Mark up
Period Period
Risk Exposure to Asset

Breakdown necessary to avoid mismatch in the
Islamic bond’s risk consideration
Asset
Entity
Property Usufruct
Sukuk contract is the cosmetic of the asset
 Fixed  Fixed  On Issuer Key challenge is on data

On the
 Floating  Floating
Business
aggregation on specific asset
classes and using these
information in pricing models
THANK YOU
No. 17-8 & 19-8 , The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur, Malaysia
Tel: +603 2772 0888 Fax: +603 2772 0808 Email : enquiries@bpam.com.my
©Copyright BOND PRICING AGENCY MALAYSIA SDN.BHD.(FORMERLY BONDWEB MALAYSIA SDN BHD). - All rights reserved.

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Pricing Mechanism For Sukuk

And Bond Structures

Malaysia’s First Bond Pricing Agency

It was reported that Malaysia’s

Binariang GSM’s Senior Islamic bond

issuance worth RM20 billion is the

Liquidity has been observed to be

Key issue in the lack of liquidity is

Problem The BPA evaluates about 2,000+ bonds that

The BPA needs to employ reliable database

From an origination and underwriting perspective, primary level pricing becomes

Providing price discovery may assist in financial institutions' compliance to international

Mexico Malaysia Thailand Korea

Methodology and Process : Audited

 With participation from:

 Adhered to strict SC requirements to qualify as

 BPAM provides valuations on a daily basis at INDIVIDUAL bond level

Four common market practices are used in conducting bond pricing.

Bond Price = f ( Benchmark Rates + Credit Spread )

Y Derivation of benchmark rate

Evaluation Yield Real Transaction

20bp Spread of specific bond

Apply relevant bond type price formula Notation Descriptions

Example: Pricing of option embedded bonds – current practice

First Call Legal

If the option is call and the exercise price at T is C, then the

So, the price of option embedded bond is P(0).

 In principle, Islamic bond structure is similar to asset

Sale Lease Equity

Price Delivery Payment Price Delivery Payment Price Payment

 Discount   Advance  Discount   Advance  Discount  Advance

Risk Exposure to Asset

 Fixed  Fixed  On Issuer Key challenge is on data

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