Government bonds, corporate debentures : a risk-return analysis with reference to the bond market in Malta

Abstract

In recent years a number of companies in Malta have offered debentures to the public. The local market, characterised by a high degree of liquidity, has absorbed these debentures, at a phenomenally fast rate. The interest rate on these debentures was relatively attractive in comparison to the return achievable on other investments, due to u low interest rate regime. Theory postulates that the return on an asset is to be commensurate to the risk it carries, otherwise a rational agent would not be interested in investing in such asset. Yet there are a number of factors that may result in the public being insufficiently informed on the risks associated with certain assets. This may result in the possibility of such assets being purchased albeit having a lower return than that commensurate with their risk. The aim of this thesis is twofold. Firstly to explore the extent to which there exists Jack of information on debentures issued by Maltese companies and whether this Jack of information is leading to these assets being purchased by the public at a rate of interest which is too low. Secondly to try and anticipate what the future may hold for these bonds, with particular reference to the impact that the adoption of the euro may have on the local bond market.