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[.]
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GRADUATION THESIS
Major: Banking and International Finance
PROPOSALS FOR DEVELOPMENT OF
VIETNAMESE BOND MARKET
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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
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Contents
Abbreviation
Content of Tables and Graphs
Preface
Introduction
CHAPTER 1: OVERVIEW OF BOND AND BOND MARKET 4
1.1 Overview of bonds 4
1.1.1 Definition and characteristics of bond 4
1.1.2 Types of bonds 5
1.1.3 Sources of profit from bonds 7
1.1.4 Factors affecting the price of a bond 8
1.1.5 Risks in investing bonds 9
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
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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 Opportunities and challenges for the development of bond markets in the coming period 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
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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
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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
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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
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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
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CHAPTER 1: OVERVIEW OF BOND AND BOND MARKET
1.1.Overview of bonds
1.1.1 Definition and characteristics of bond
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
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
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
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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 5 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: