Facebook @Dethivaonganhang www facebook com/dethivaonganhang www ThiNganHang com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang 1 GRADUATION THESIS Major Banking and International Finance PROPOSALS FOR[.]
Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang GRADUATION THESIS Major: Banking and International Finance PROPOSALS FOR DEVELOPMENT OF VIETNAMESE BOND MARKET www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang Acknowledgement This graduation thesis is the result of thirteen weeks of research and writing during the spring of 2015 It has been an interesting and learning experience In fulfilling this thesis, I would like to give my special thanks to many people for their significant help, contribution, and recommendations during my writing process First and foremost, special mentions and grate thanks must go to Mr Phan Tran TrungDzung, my supervisor at Hanoi Foreign Trade University With his master knowledge and experience in writing thesis, he has wholeheartedly helped me in writing this thesis I could not have been able to complete this thesis without his positive suggestions and guidance Secondly, I would also like to give my heartfelt thanks to the authors who provided me with valuable books for my thesis My appreciation is to my family and my friends for their supports and encouragements Gratefulness is to the readers also, whose feedback will help much in improving the thesis Hanoi, May 2015 Chu Le Thuy Quyen www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang Contents Abbreviation Content of Tables and Graphs Preface Introduction CHAPTER 1: OVERVIEW OF BOND AND BOND MARKET 1.1 Overview of bonds 1.1.1 Definition and characteristics of bond 1.1.2 Types of bonds 1.1.3 Sources of profit from bonds 1.1.4 Factors affecting the price of a bond 1.1.5 Risks in investing bonds 1.2 Overview of bond market 11 1.2.1 Definition of bond market 11 1.2.2 Roles of bond market 13 1.2.3 Types of bond trading 15 1.3 Factors affecting to bond market 17 1.3.1 Political and economic stability 17 1.3.2 Legal environment 17 1.3.3 Participation of objectives 18 1.4 Credit rating 18 1.4.1 Definition of credit rating 18 1.4.2 Function of credit rating 18 1.4.3 The importance of credit rating agencies 19 CHAPTER 2: OPERATION OF VIETNAMESE BOND MARKET 22 2.1 Formation and development of Vietnamese bond market 22 2.1.1 Legal framework for the development process of Vietnamese bond market 22 2.1.2 The process of Vietnamese bond market’s formation and development 24 2.2 Operation of Vietnamese bond market 25 www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang 2.2.1 Situation of bond issuance 25 2.2.2 Bond trading status 37 2.3 Assessing operational status of Vietnamese bond market 39 2.3.1 General comments 39 2.3.2 Achievements 41 2.3.3 Limitations 44 2.4 Limitations’ cause 46 2.4.1 Small market size, low liquidity 46 2.4.2 Liquidity of the bond market 47 2.4.3 The lack of market makers 48 2.4.4 The lack of specified credit rating agencies 50 2.4.5 Awareness of corporation and investors about bonds are limited 52 2.4.6 The competitiveness of bonds is low 54 2.4.7 The legal system is not appropriate 54 Chapter 3: PROPOSALS FOR DEVELOPMENT OF VIETNAMESE BOND MARKET 56 3.1 Vietnamese bond market’s prospect in the future 56 3.1.1 period Opportunities and challenges for the development of bond markets in the coming 56 3.1.2 The views and orientation Vietnamese Bond Market Government 58 3.2 Lessons learned from the development of bond markets in some countries 59 3.3 Proposals for developing Vietnamese bond market 62 3.3.1 Stabilizing macroeconomic environment, encourage saving and investment 62 3.3.2 Diversifying bonds, raising market liquidity 62 3.3.3 Establishing market makers to facilitate operation of the bond market 65 3.3.4 Contributing and developing system in Vietnam credit rating 67 3.3.5 Raising the awareness of businesses and investors on the bond market 69 3.3.6 Completing the legal system related to the operation of the bond market 70 Conclusion 72 References www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang Abbreviations MOF: Ministry of Finance VGB: Vietnamese Government Bond ADB: Asian Development Bank CIC: Credit Information Center OTC: Decentralized market (Over the Counter) Content of Tables and Graphs Tables Table 2.1: Size of Government bonds from 2006 to 2014 26 Table 2.2: Interest rate of Vietnamese government bond from 2013 to Q1/2015 29 Table 2.2: Value of corporate bond issuance in recent years 35 Table 2.3: Size and Composition of Local Bond Markets 37 Graphs Graph 2.1: Trading volume and Successful biding rate 28 Graph 2.2: Growth rate of Asian Countries 34 Graph 2.3: Trading and Listed value of bonds 2005-2008 38 www.ThiNganHang.com S Á C H – T À I L I Ệ U T H I T U Y Ể N Trang Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang Preface A developed securities market consists of the following assets: stocks, bonds, and treasury certificate and derivative products However, looking back at the Vietnamese securities market at the moment, it has yet to achieve a high level or in other words is not the internationally recognized as a developed securities market The causes of this issue include many factors such as the size of the market or the market capitalization, the legal framework, the liquidity of the market However; the size of goods traded bonds in the total size of the market is one of the most important factors In total daily trading volume on the official or unofficial market the stock items are a big attraction for investors, while the trading of commodity bonds are still silent and seems to be rather strange concept for most investors, especially domestic investors Meanwhile, for foreign investors and banking institutions, the commodity bonds are indispensable items in the portfolio even commodities investment strategy for improving fertility rates interest rate risk as well as the list of these units, and they have also achieved some good results Vietnamese securities market was born this way more than nine years, while the Vietnamese bond market is only beginning to develop more than three years and is promising as an attractive market for investors and financial institutions Study, learn some basic content of bonds, actual formation, operation and development of the bond markets of some countries in the world to compare with reference to the situation in Vietnam stock market Men to be given a number of measures to promote and develop the bond market in Vietnam, which is now the main goal to choose and studies on the subject In this project the author neglected to mention the formula calculation or valuation of the bonds that have focused on analyzing the current situation and development formed so that gives some solution for markets Due to the limited time and knowledge of the writer, this thesis inevitably contains some limitations and shortcomings Therefore, I would like to receive every feedback or comment from instructor, teachers and all people who are interested in this topic to improve the quality of this thesis Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang Introduction Rationale Bonds are a useful tool to help governments, local governments and enterprises to mobilize capital for development investment At the same time, bonds are also a tool on securities market helps investors get profit and limit risk The presence of bond markets has varied over the financial markets, overcome some of the limitations of the market and facilitate the transfer of capital, enhancing social savings Because of the important role of the bond market that the countries with economies in developed markets and countries with developing economies are interested in this market At present, Vietnam has a lot of bonds are issued such as government bonds, local government bonds, corporate bonds with different purpose and maturities According to the Ministry of Finance, the bond market last time there was a remarkable development, system specific mechanisms and policies for bond market performance so far has been enacted relatively complete, covering most of the issuance and trading of bonds, created the foundation necessary to encourage, promote and diversify the forms of long-term capital mobilization through issuing bonds In terms of market operators, in 2014, the bond market was more volatile Government bond yields continued to be operated flexibly, closely followed developments of the market reality, meeting the requirements of capital market development, gradually coordinated with the operator of the central bank monetary policy and as a basis for the mobilization of capital in the current period In terms of the number of bonds issued are also constantly increasing However, Vietnamese bond market also exhibited many limitations According to statistics, the majority of bonds AseanBondOnline in Vietnam's government bonds, only some are allowed to issue corporate bonds, such as Vietnam Electricity Group, financial company shares oil and gas, investment and development companies freeway the aim is to invest long-term projects On the other hand our country's stock market has mainly occurred stock transactions, bond transactions are limited, mostly to buy and hold to maturity To improve the efficiency of raising capital, in order to perform the tasks of economic development - social, integration needs the world economy, the development of Vietnam bond market became a mobilization channel capital quickly, efficiently, addressing the demand for capital investment projects, the budget deficit of the government, needs capital for the production and reproduction of the business expansion as well as create additional industrial goods to market demands faced by the government and the enterprises Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang According to the above reasons I chose research topics: “PROPOSALS FOR DEVELOPMENT OF VIETNAMESE BOND MARKET” Purposes for study First: To systemize fundamental issues of bonds and bond markets Second: To evaluate the activity of our country's bond market Third: Since the limitations exist given some suggestions to develop the bond market in the future Objectives and scope of the study Objectives of the research are the issue related to the issuance and trading of government bonds and corporate bonds of Vietnam Besides thesis also examines the operation of the bond market in some countries such as the USA, the East Asian countries to compare and have better overview of our country's bond market About time, limited research thesis is the operation of Vietnam bond market from 2006 to 2015 Methodology To resolve the purposes of the topics, I have to apply theoretical subjects: Financial Market and Institutions, Corporate Finance, Financial Investments, Stock, underlying reasoning; Besides, I use statistical methods and data aggregation methods to assess the operational status of Vietnamese bond market; using methods comparable to some local bond market for further evaluation of Vietnam bond market, using the experience of other countries as a basis to propose appropriate solutions, to promote market Vietnam bonds advocacy and development Structure of the thesis The thesis consists of 72 pages, the structure as follows: Chapter 1: Overview of bond and bond markets Chapter 2: Operation of the Vietnam Bond Market Chapter 3: Proposals for development of Vietnamese bond market Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang CHAPTER 1: OVERVIEW OF BOND AND BOND MARKET 1.1.Overview of bonds 1.1.1 Definition and characteristics of bond 1.1.1.1 Definition A bond is a long-term debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate The issuer of a bond is obligated to pay interest (or coupon) payments periodically (such as annually or semiannually) and the par value (principle) at maturity Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities Owners of bonds are debtholders, or creditors, of the issuer 1.1.1.2 Characteristics of bond Bonds have a number of characteristics All of these factors play a role in determining the value of a bond and the extent to which it fits in your portfolio - Face Value/Par Value The face value (also known as the par value or principal) is the amount of money a holder will get back once a bond matures A newly issued bond usually sells at the par value Corporate bonds normally have a par value of $1,000, but this amount can be much greater for government bonds A bond's price fluctuates throughout its life in response to a number of variables (more on this later) When a bond trades at a price above the face value, it is said to be selling at a premium When a bond sells below face value, it is said to be selling at a discount - Coupon (The Interest Rate) The coupon is the amount the bondholder will receive as interest payments It's called a "coupon" because sometimes there are physical coupons on the bond that you tear off and redeem for interest However, this was more common in the past Nowadays, records are more likely to be kept electronically The coupon is expressed as a percentage of the par value A rate that stays as a fixed percentage of the par value like this is a fixed-rate bond Another possibility is an adjustable interest payment, known as a floating-rate bond - Maturity Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang The maturity date is the date in the future on which the investor's principal will be repaid Maturities can range from as little as one day to as long as 30 years (though terms of 100 years have been issued) A bond that matures in one year is much more predictable and thus less risky than a bond that matures in 20 years Therefore, in general, the longer the time to maturity, the higher the interest rate Also, all things being equal, a longer term bond will fluctuate more than a shorter term bond - Callable and convertible Callable bond: A call feature, or call provision, is an agreement that bond issuers make with buyers This agreement is called an "indenture," which is the schedule and the price of redemptions, plus the maturity dates Puttable bond: A bond that allows the holder to force the issuer to repurchase the security at specified dates before maturity The repurchase price is set at the time of issue, and is usually par value Convertible bond is a bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder Convertibles are sometimes called "CVs." 1.1.2 Types of bonds Government and municipal bonds: are issued by government or local authorities due to the budget deficit or investing in infrastructures, social welfare or public constructions There can be other types of bonds depending on the purpose of government or local authorities Some typical types of bonds are: Treasury bonds: issued by State Treasury to finance government expenditures These bonds are usually medium-term or long term loans (from years to 30 years) and are risk-free bonds Municipal bonds: issued by local authorities to mobilize capital for infrastructures and public constructions They are long term bonds (from 10 years to 30 years) Corporate Bonds: issued by corporation to mobilize capital They include short-term, medium-term and long-term bonds Corporate bonds are characterized by higher yields because there is a higher risk of a company defaulting than a government The upside is that they can also be the most rewarding fixed-income investments because of the risk the investor must take on The company's credit quality is very important: the higher the quality, the lower the interest rate the investor receives Some typical types of corporate bonds are: Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang Mortgage bonds: A bond secured by a mortgage on one or more assets These bonds are typically backed by real estate holdings and/or real property such as equipment In a default situation, mortgage bondholders have a claim to the underlying property and could sell it off to compensate for the default Unsecured bonds: also called debentures, are not backed by equipment, revenue, or mortgages on real estate Instead, the issuer promises that they will be repaid This promise is frequently called "full faith and credit." These bonds are normally issued by high credit-rating or huge company with good reputation Convertible bonds: Bond that can be exchanged for theissuingcompany'sother securities (common stock or ordinary shares, for example) under certain terms and conditions This type of bonds is quite attractive to investors Income bonds: A type of debt security in which only the face value of the bond is promised to be paid to the investor, with any coupon payments being paid only if the issuing company has enough earnings to pay for the coupon payment The income bond is a somewhat rare financial instrument which generally serves a corporate purpose similar to that of preferred shares Coupon bonds: are the bonds that the buyers will received an amount of money periodically The interest rate stated on a bond when it's issued The coupon is typically paid semiannually Fixed rate bonds: Bond whose interest amount remains constant until maturity Floating rate bonds: Bond whose interest amount fluctuates in step with the market interest rates, or some other external measure Price of floating rate bonds remains relatively stable because neither a capital gain nor a capital loss occurs as market interest rates go up or down Amortized Bonds: An amortized bond is a financial certificate that has been reduced in value for records on accounting statements An amortized bond is treated as an asset, with the discount amount being amortized to interest expense over the life of the bond If a bond is issued at a discount - that is, offered for sale below its par (face value) - the discount must either be treated as an expense or amortized as an asset Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang Adjustment Bonds: issued by a corporation during a restructuring phase, an adjustment bond is given to the bondholders of an outstanding bond issue prior to the restructuring The debt obligation is consolidated and transferred from the outstanding bond issue to the adjustment bond Junk Bonds: also known as a "high-yield bond" or "speculative bond," is a bond rated "BB" or lower because of its high default risk Junk bonds typically offer interest rates three to four percentage points higher than safer government issues Angel Bonds: are investment-grade bonds that pay a lower interest rate because of the issuing company's high credit rating Angel bonds are the opposite of fallen angels, which are bonds that have been given a "junk" rating and are therefore much more risky Bond with call option (callable bond): This feature give the issuer the right, but not obligation, to redeem his issue of bonds before the bonds maturity at predetermined price and date Bond with put option (puttable bond): This feature give the issuer the right, but not obligation to sell their bond back to the issuer at the predetermined price and date 1.1.3 Sources of profit from bonds Investors who buy bonds can receive profit from the three following potential sources: Profit from interest income: When an investor buys a bond, he is loaning money to the issuer The interest rate, or the coupon rate, is determined by the general level of interest rates at the time issuing, the maturity of the bond, and the credit rating of the issuer Capital gain:Many bonds are not held until maturity Investors need money back before their bonds mature so they sell them through a broker When that happens, investors might earn a capital gain or experience a capital loss depending upon what has happened to the credit quality of the issuer Interest-on-interest: The interest that is earned upon the re-investment of interest payments Interest-on-interest is primarily used in the context of coupon paying bonds, where all coupon payments are assumed to be re-invested at some Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang interest rate and held until the bond matures, or when the bond is sold Interest-oninterest is an important consideration an investor must make when analyzing potential investments, as interest-on-interest must be considered when forecasting an investment's total cash return So, the real interest rate of a bond might be far different from the nominal interest rate To evaluate the interest exactly, we need to consider all of above potential sources of profit 1.1.4 Factors affecting the price of a bond Bonds prices are affected by the factors that influence interest rate movement Interest rate in the market is an important factor in evaluating the bond price In general, when interest rates rise, bond prices fall When interest rates fall, bond prices rise Discount Rate A bond's value is measured based on the present value of the future interest payments the bond holder will receive To calculate the present value, each payment is adjusted using the discount rate The discount rate is a measure of what the bondholder's return would be if he invested his money in another security In practical terms, the discount rate generally equals the coupon rate or interest rate associated with similar investment securities Inflation In general, when inflation is on the rise, bond prices fall When inflation is decreasing, bond prices rise That’s because rising inflation erodes the purchasing power of what you’ll earn on your investment In other words, when your bond matures, the return you’ve earned on your investment will be worth less in today’s dollars Credit ratings Credit rating agencies assign credit ratings to bond issuers and to specific bonds A credit rating can provide information about an issuer’s ability to make interest payments and repay the principal on a bond In general, the higher the credit rating, the more likely an issuer is to meet its payment obligations – at least in the opinion of the rating agency If the issuer’s credit rating goes up, the price of its bonds will rise If the rating goes down, it will drive their bond prices lower With corporate bonds, the financial performance of the company and the cash it is generating also affect to the Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang credit rating Bond analysts like to know that their debtor is generating enough cash to comfortably service the debt If one of the ratings agencies downgrades a company's creditworthiness to below investment grade (BBB), the price of the bonds is likely to fall Exchange rates Exchange rates affect bond prices because if, for instance, the pound is struggling against other currencies, the Bank of England may feel it necessary to increase interest rates Call feature or put feature Call feature or put feature also affects the bond price With a callable bond is favorable for the issuer but it is unfavorable for the investors, so that this bond usually has higher interest rate compare to the bond with the same maturity On the contrary, the puttable bond has lower interest rate compare to the bond with the same maturity Convertible feature The bond with convertible feature will have higher price than the one without this feature The demand and supply of the market Like other kinds of goods, bonds prices are also depend on the demand and supply of the market When the issuer supplies more bonds than the market demand, the bond price will decrease and vice versa 1.1.5 Risks in investing bonds Bonds may generate an income stream for investors and, depending on the issues, they may also help mitigate overall portfolio risk But keep the six major risks of bond investing in mind before dabbling in these individual issues 1.1.5.1 Interest Rate Risk Interest rates and bond prices carry an inverse relationship; as interest rates fall, the price of bonds trading in the marketplace generally rises Conversely, when interest rates rise, the price of bonds tends to fall This happens because when interest rates are on the decline, investors try to capture or lock in the highest rates they can for as long as they can To this, they will scoop up existing bonds that pay a higher interest rate than the prevailing market rate This increase in demand translates into an increase in bond price On the flip side, if the prevailing interest rate were on the rise, investors Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang would naturally jettison bonds that pay lower interest rates This would force bond prices down 1.1.5.2 Reinvestment Risk Another danger that bond investors face is reinvestment risk, which is the risk of having to reinvest proceeds at a lower rate than the funds were previously earning One of the main ways this risk presents itself is when interest rates fall over time and callable bonds are exercised by the issuers The callable feature allows the issuer to redeem the bond prior to maturity As a result, the bondholder receives the principal payment, which is often at a slight premium to the par value However, the downside to a bond call is that the investor is then left with a pile of cash that he or she may not be able to reinvest at a comparable rate This reinvestment risk can have a major adverse impact on an individual's investment returns over time To compensate for this risk, investors receive a higher yield on the bond than they would on a similar bond that isn't callable Active bond investors can attempt to mitigate reinvestment risk in their portfolios by staggering the potential call dates of their differing bonds This limits the chance that many bonds will be called at once 1.1.5.3 Inflation Risk When an investor buys a bond, he or she essentially commits to receiving a rate of return, either fixed or variable, for the duration of the bond or at least as long as it is held But what happens if the cost of living and inflation increase dramatically, and at a faster rate than income investment? When that happens, investors will see their purchasing power erode and may actually achieve a negative rate of return (again factoring in inflation) Put another way, suppose that an investor earns a rate of return of 3% on a bond If inflation grows to 4% after the bond purchase, the investor's true rate of return (because of the decrease in purchasing power) is -1% 1.1.5.4 Credit/Default Risk When an investor purchases a bond, he or she is actually purchasing a certificate of debt Simply put, this is borrowed money that must be repaid by the company over 10 Facebook: @Dethivaonganhang www.facebook.com/dethivaonganhang time with interest Many investors don't realize that corporate bonds aren't backed by the full faith and credit of the U.S government, but instead depend on the corporation's ability to repay that debt Investors must consider the possibility of default and factor this risk into their investment decision As one means of analyzing the possibility of default, some analysts and investors will determine a company's coverage ratio before initiating an investment They will analyze the corporation's income and cash flow statements, determine its operating income and cash flow, and then weigh that against its debt service expense The theory is the greater the coverage (or operating income and cash flow) in proportion to the debt service expenses, the safer the investment 1.1.5.5 Rating Downgrades A company's ability to operate and repay its debt issues is frequently evaluated by major ratings institutions such as Standard & Poor's or Moody's Ratings range from 'AAA' for high credit quality investments to 'D' for bonds in default The decisions made and judgments passed by these agencies carry a lot of weight with investors If a company's credit rating is low or its ability to operate and repay is questioned, banks and lending institutions will take notice and may charge the company a higher interest rate for future loans This can have an adverse impact on the company's ability to satisfy its debts with current bondholders and will hurt existing bondholders who might have been looking to unload their positions 1.1.5.6 Liquidity Risk While there is almost always a ready market for government bonds, corporate bonds are sometimes entirely different animals There is a risk that an investor might not be able to sell his or her corporate bonds quickly due to a thin market with few buyers and sellers for the bond Low interest in a particular bond issue can lead to substantial price volatility and possibly have an adverse impact on a bondholder's total return Much like stocks that trade in a thin market, you may be forced to take a much lower price than expected to sell your position in the bond 1.2.Overview of bond market 1.2.1 Definition of bond market 11