Determinants of Corporate Bond Yield: The Case of Malaysian Bond Market

Abstract

Default risk has been recognized as one of the key determinants of bond yield. Past studies argue that default risk can be reflected by issue characteristics, issuer characteristics and interest rate behaviors on riskless security. As default risk is believed to be higher in developing markets due to the issue of illiquidity, capital inadequacy and a developing lending system, more empirical works must be focused on these markets. The present study examines the association between selected determinants and corporate bond yield in Malaysian market. Instead of focusing on the aggregate market level as has widely been carried out in previous studies, the present study concentrates on the individual issue level. The results of cross-sectional multiple regression analyses based on 61 observations in 2012 indicate that bond maturity, coupon payment, trading frequency, issuer’s rating, debt to equity ratio and return on equity ratio are the significant determinants of bond yield.Keywords: Corporate Bond Yield; Malaysian Bond Market.

Determinants of Indonesian corporate bond yield

“…rate coupon is one of the factors that determine the bond yield. Yahya et al (2016) found that there was a negative and significant relationship between coupon payments and bond yields. It should be noted, however, that coupon rate also reflects the amount of tax on which investors are charged considering that bonds with high coupon rates will be burdened with high taxes (Lu et al, 2010) and therefore bonds with low coupon rates will be more valuable.…”

“…The same conclusion results were also found by Chen et al (2007) which stated that the less illiquid of a bond will result in higher yield demand. However, Yahya et al (2016) stated that the higher volume of transactions also indicates the higher the price volatility, and consequently investors are promised to yield higher as compensation. Based on the description, it can be proposed the following hypothesis:…”

“…The potential for large risks is more likely to occur in longer-term investments. This greater potential risk is driven by exposure to bonds from interest rate risk and risk of price changes (Yahya et al, 2016). Bonds with a longer maturity will require guarantees that are usually marked with high yield-rate requirements as well.…”

“…Bond ratings have an important role in providing information about the quality of a bond and reflecting the yield of a bond. Bonds issued by issuers with low ratings indicate high risk of default and have negative correlation with its yield (Yahya et al, 2016). On the other hand, a high rating indicates that the bond issuer is credible, reliable, and default risk becomes lower.…”

“…Indarsih (2013), Yuliani et al (2016) Oktavian et al (2015), and Dhar (2016). Meanwhile, study that examines specifically the characteristics of bonds as a determinant of bond yields was done by Yahya et al (2016).…”