Bond and Loan

Boan and Loan act very different according to the agreement.

Basically bond and loan is issue when the company is need of money and want to borrow money from the share holders instead of borrowing money from bank.

In bond / loan; the company will agree on a fixed interest rate pay to the loan / bond share holder. BUT normally this interest rate is low and is not attractive.

Because the company does not want to pay out cash on the expiry date;

Normally Bond and Loan will issue the Irredeemable Convertible Unsecured Loan Stock (ICULS).

And this is the part that make loan / bond more interesting.

ICULS is totally based on the aggrement; it can be structure in:

i)  Loan / Bond + Fixed Price to exchange to mother share at the expiry date
or
ii) Fixed Number of loan / bond to exchange to mother share
or
iii) Any other method based on Agreement

Again, example will give a better picture:

Berjaya Loan - ICULS

Loan share holder can exchange to mother share with

i) 2 warrant convert to 1 mother share at the expiry date
or
ii) 1 warrant + RM 0.50 to exchange to 1 mother share at expiry date

This gives a various way for you to determine the FAIR PRICE of this loan

Case 1
Let say Currently BJ Corp at RM 1.50

If we use (i) method; the FAIR PRICE of this loan should be
RM 1.50 / 2 = RM 0.75

If we use (ii) method; the FAIR PRICE of this loan should be
RM 1.50 - RM 0.50 = RM 1

IF THE ACTUAL MARKET value this loan at (i) method, RM 0.75; then everyone might want to buy it because once you are having the share; you can choose the (ii) method to exchange on the mother share

So, the Fair Price in this case should follow on (ii) method which is RM 1

Case 2
Let say Currently BJ Corp is at RM 0.80

If we use (i) method; the FAIR PRICE of this loan should be
RM 0.80 / 2 = RM 0.40

If we use (ii) method; the FAIR PRICE of this loan should be
RM 0.80 - RM 0.50 = RM 0.30

IF THE ACTUAL MARKET value this loan at method (ii) RM 0.30; then everyone might want to buy it because once you are having the share; you can choose the (i) method to exchange on the mother share

So, the Fair Price in this case should follow on (i) method which is RM 0.40

Note: In Bond / Loan Market, the agreement can be different. And you can only redeem the mother share at its expiry date. You will need to monitor closely on the mother share value according too the agreement.

Exchange Trade Fund

Exchange Trade Fund (ETF) is a fund to buy into all the shares according to the index.

A simple understanding of ETF is; an index stock.

In Bursa Malaysia, we have FBMKLCI. This is the index stock of KLCI. The price of FBMKLCI will move according to KLCI.

Let say today KLCI closing at 1294 points; then FBMKLCI will close at RM 1.294

If you does like index a lot; this will be your choice of stock to invest. You can trade like other stocks.

Having this stock is like investing in all shares in KLCI index (Please remember KLCI is just based on TOP 30 company)

ETF will trade freely in the market; But the price is very very near to the NAV of the index

ETF will announce the NAV daily; and will give out dividen in a fixed period.

Warrant

Warrant is a “Structured Share” of the mother share in a certain of period

The structure of Warrant consists of 2 kinds of price
i)  Fixed price
ii) Market Price

It is a bit hard to explain in defination; so let us just pick an example.

Example:

JCY issue a warrant to the market,

i)   Fixed price of warrant is RM 1.00
ii)  Let say the exchange ratio is 2 warrant : 1 mother share
iii) The Fair price of this warrant in the market is 25sen. (Market might value it a bit higher or lower)

If JCY go up to RM 1.60; the Warrant will be value at RM 0.30

BUT, if JCY went lower then RM 1.00, let say RM 0.90; this warrant will be worthless.

All warrant come with a due date.
If the warrant reach its due date; and the Mother share price is lower then Fixed Price, then this warrant will be expired worthless.

Opportunity and Treats

Because of the fixed price; warrant is issue in low price
Price movement of warrant will be similar to mother share

Percentage of price movement in warrant will be big compare with the mother share

Eg.

JCY up 10sen; the warrant also up 10sen
ROI of JCY = 10 / 150 = 6.7%
ROI of JCY warrant = 5 / 25 = 20%

Of course, if price goes up the earning % is high; if price goes down the losing % will be also high

As mention above; if the due date approach and the mother share is lower then the fixed price; this warrant will be Expired Worthless. Someone might ask how could this be.

Eg.

JCY market price is RM 0.90
If you want to execute your warrant; you will need to pay RM 1.00(with 2 warrant share) to exchange for 1 mother share INSTEAD of buying in the market for RM 0.90
Of course you will not execute in this trade. So it just expired worthless.