Preliminary calculations by KiniBiz with the help of bond specialists show that mispricing of 1Malaysia Development Bonds could have been as high as 20 percent of the total bonds involved, or some RM4 billion on bonds issued or in the process of being issued of some RM20 billion.

Bond issues made by 1Malaysia Development Bhd (1MDB) have raised substantial interest because of their attractive interest rates.

But investors have found to their chagrin that they are unable to subscribe, and that the bonds are issued to a select club instead through private placements.

“I would have loved to get my hands on those bonds,” one bond trader said.

Basically, what happens is that the bonds are priced to yield more than the market rates. And because these bonds are long-term, they yield higher interest rates over many years.

Once they are on the market, the prices adjust to yield returns with comparable securities, giving windfall gains to those who got in on the first floor.

Financial shenanigans

It’s just yet another example of financial shenanigans that routinely take place in the world today with big-name investment banks associated with them and working hand-in-hand with the issuers.

For this to happen, the transactions need to take place in private with as little of the terms as possible coming into public hands so that few will notice the mispricing.

The secondary trading too often takes place under veils of secrecy to stop prying eyes from discerning how much the players have made.

Bonds are financial instruments that need to be handled with care because there is one variable that can send their values tumbling - or rising. That is interest rates.

If a bond is priced to yield more than comparable yields, the value of the bond can be considerably different.

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