How 1MDB lost RM6b through bond mispricing

KINIBIZ A big chunk of 1MDB’s fundraising over the years had been through issuing bonds. However, the company had been massively underpricing its bonds, losing some RM6 billion according to KINIBIZ estimates - and this is not paper but real, cold, hard cash.

When a bond is issued, it has a coupon rate and a face value. The coupon rate typically remains constant over the life of the bond and is a promise by the issuer to pay a certain percentage of the face value of the bond each year.

Bonds are commonly priced to give roughly similar yields as other comparable bonds in the open market. Yields are the annual coupon payments for the year divided by the price of the bond. Yields are adjusted by raising or lowering the bond price - they move in opposite directions.

But bonds are fickle things where small changes make huge differences, especially if the maturity period of the bond is long.

For example, a RM5 billion bond priced to yield two percentage points more than market rates over 30 years can mean underpricing of at least RM1 billion. It’s like selling property below the market price only for the buyer to immediately flip it at market price, taking the difference as quick profit.

This was what 1MDB did with its bonds. Its various bonds over the years were priced to yield considerably more than going market rates at the time, which in turn heavily discounted the bonds’ prices compared to market levels.