Bond investments; How It Works, Its Advantages and Disadvantages

financialtreat – will explain about Bond investments; How It Works, Its Advantages and Disadvantages you will get in the following article. Let’s look at this article carefully!

Bonds for people who enter the world of investment are certainly familiar. However, for ordinary people, the word bond is still foreign, and not many know it. People know bonds may only be in school when learning about economics without knowing what it looks like.

Therefore, here it will be explained what Bonds are including how they work, their advantages and disadvantages. This is important to know for those of you who want to jump into the world of investment so that later it will not be a misstep. Straight away, here’s the explanation!

Definition of Bonds

In the Indonesian Dictionary, a Bond is defined as a sealed document stating that the issuer will repay its principal debt at a certain time, and will periodically pay coupons to the bondholder; Usually, bonds are tied with a guarantee that can be sold to pay off claims if the issuer fails to pay coupons and principal at maturity (bond).

A bond is a bond issued by a party that owes to the indebted party. In short, bonds are bonds that can be purchased and buyers will benefit in the form of interest later. In the bond contains the maturity date of the payment of debt and interest. Interest in bonds is called coupons. Coupons must be given by the bond issuer to the bondholder.

In Indonesia, the tempo or term of the old bond is 1 to 10 years. So, bonds are included in the medium-term long-term debt. Bonds are listed on the Stock Exchange, such as stocks, Sukuk, Asset-Backe Securities, and Real Estate Investments. In addition to the state, bonds can also be issue by companies.

Difference between Stocks and Bonds

In general, stocks and bonds have almost the same purpose, namely as a means of obtaining capital or funds for the benefit of the company. The difference between stocks and bonds is that the owner of the stock has the right to the company’s profits as well as voting rights. As for bonds, the owner only has the status of a debtor. The issuing company sells part of its ownership to the other party, while the bond issuing company issues debt that can be purchase.

Shares are a form of ownership of a company and shareholders are entitle to company profits or often calle dividends. While bonds are debt securities issue by companies or government agencies as a form of borrowing money which will then be paid back the cost of goods owe along with interest or the term is calle coupons.

Advantages of Investing in Bonds

Investing in bonds has its own advantages. Although the profit potential is not as big as stocks, bonds are safer. Here are some of the advantages.

Get coupons or ratios periodically from the securities of the purchase debt. The coupon rate or ratio is higher than the interest rate of Bank Indonesia (BI Rate). So, obviously, the benefits of debt securities are greater than deposits.

  • Obtaining capital gains (profits from the sale of higher-price capital assets)
  • The level of return is already taken into account at the beginning of the investment

Many choices of debt securities series that investors can choose from in the secondary market (securities sold again by investors on the IDX).

If you have a state debt, it is certainly guarantee so you don’t have to worry about its security. All are liste in Law Number 24 of 2002 concerning State Debt Securities or Law Number 24 of 2008 concerning State Sharia Securities. For that it must be pay back plus return (coupon)

Bond coupons have a higher value than deposit interest gains. This can make you choose to invest through debt securities because the profit is maximum.

You can make debts as collateral and collateral. So, you can use it to take out loans to banks or buy shares on the stock exchange.

Disadvantages of Investing in Bonds

In addition to having advantages / advantages, investing in bonds certainly also has shortcomings. Here are some of the shortcomings of bonds as investments that you need to know:

Liquidity risk to private and government bonds. Although government bonds are safer, it is not impossible that the bonds are less liquid or difficult to resell on the secondary market because there are rarely investors who want to.

Maturity risk is more common in corporate bonds relate to the maturity of bonds. The longer the bond matures, the higher the risk. How to get around it, investors can ask for premium maturity or bonds that are shorter maturities for example three years away.

The risk of default that only occurs in corporate bonds. Unlike SUN, corporate bonds are not guarantee by the government. Well, investors should be aware of the risk of default or default should the company go bankrupt.

Types of Bonds

Base on the issuer side, there are 3 types of bonds that need to be know.

Corporate Bonds. Corporate bonds are bonds issue by state-owne enterprises (SOEs) or private companies.

  • Government Bonds. Government bonds are bonds issue by the government. In Indonesia this type of bond is issue every 1 year under the name retail state bond (ORI). First publishe August 2006.
  • Regional Bonds. Regional bonds are bonds issue by local governments. The goal is to assist local governments in carrying out development.

Base on the nominal, bonds are divide into two different types, namely:

  • Conventional Bonds. Is a bond or debt with a very large nominal amount of approximately 1 billion rupiah per slot.
  • Retail Bonds. Retail bonds are bonds that have a small nominal, for example 1 million rupiah.
  • Base on the interest payment, there are 4 types of bonds that are important to know.
  • Coupon Bonds. Is a debt bond that periodically provides interest to its investors. This coupon contains a certain amount in accordance with the agreement of both parties before.
  • Zero Coupon Bond. Is an interest-free debt and does not have to be pay periodically. The investor will benefit from the difference in the discounte selling price and the initial price of the debt when trade. This type of bond has a maturity period ranging from 1 – 10 years.
  • Fixe Coupon Bonds or Fixe Coupons. This type of bond has a bond offering with a fixe interest rate until the maturity time of the bond arrives.
  • Floating Coupon Bonds or Floating Coupons. Coupons offere by this type of bond can change in value depending on the money market index. In this bond, there is a minimum limit coupon in it which means that the first coupon set will be the minimum coupon amount that is valid until the maturity time.

And base on yields, bonds are divide into several types below.

  • Conventional Bonds. Is a debt bond issue by a party to get a loan that will be use as additional capital, namely by providing returns / interest to investors within a certain period of time.
  • Sharia Bonds. This type of debt is issue with the aim of providing returns in the form of rent whose calculations are measure in accordance with Islamic sharia principles and without containing the element of riba. In Islamic bonds, the yield will be pay periodically within the specifie period or period.

Characteristics of Bonds

Here are some characteristics of bonds, namely:

Bond Value.

The value of the bond or per bond value is the amount of money borrowe by the company and repaid before maturity. Bonds issue by a party must provide clear information about the amount of money neede or the amount of bond emissions determine base on the company’s performance, cash flow owne, and how much the company itself needs.

Due Date

The maturity date is determin base on when the bond was issue, and usually has a term of 1 – 10 years. However, investors generally choose a maturity time of 5 years or a shorter period of time because it is considere to have a lower risk.

Principal and Coupon Rate

Principal rate is the amount of money relate to par value, redemption value, and maturity value. The nominal is issue by the bond issuer and given to the party who receive the bond at maturity time. Meanwhile, coupon rate or coupon rate is the interest that must be pay by bond issuers annually to bondholders.

Payment Time

Coupons or bond interest rates must be pay by the issuer periodically in accordance with the agreement that has been make before, which can be per semester, per three semesters, per quarter, and so on.

Also Read financial management:

Bond Market

Bonds are tradable securities. To make bond transactions, you can do it in two bond markets, namely the primary market and the secondary market. The primary market is where bonds are trade when they begin to be issue.

One of the requirements of transactions in the primary market stipulate by the Capital Market is that bonds must be liste on the stock exchange to be offere to the public, in this case the Indonesia Stock Exchange (IDX). As for the secondary market is where bonds are trade after they are issue and liste on the IDX, bond trading will be carrie out in the secondary market.

That’s the explanation for bonds. Good luck!

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