Bonds are financial instruments that offer a steady income and are usually considered a safer investment alternative to stocks.
For those of you who want to learn more about bonds, this article will discuss the definition of bonds, terms that are often used in bonds, types of bonds, the advantages of bond investment, and the differences between bonds and stocks.
By understanding these concepts, you can make smarter investment decisions and can better diversify your portfolio.
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What Are Bonds?
Bonds are one of the most widely used financial instruments in the capital market. In simple terms, bonds are bonds issued by governments, companies or financial institutions to obtain funds from investors.
Bonds are a type of investment with a lower potential return compared to stocks, but are considered safer because of the relatively lower risk.
The definition of a bond itself can be interpreted as an agreement between the issuer of the bond and the investor, in which the issuer of the bond promises to pay fixed interest or dividends for a certain period of time and return the investment funds at maturity.
These interest or dividend payments are called coupons, and the number of coupons received usually depends on the interest rate and credit quality of the bond issuer.
In bond investment, investors can get a fixed income within a predetermined period of time and have a relatively lower risk compared to stocks.
However, like any other investment, bond investment also has risks that investors need to consider and anticipate.
Therefore, before deciding to invest in bonds, you should study bonds in detail and pay attention to the risk factors that can affect their investment value.
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Terms in the Bonds and Their Explanations
Bonds are relatively complex investment instruments and involve a variety of special terms. To be able to understand the characteristics and risks of bond investment properly, you need to understand some important terms in bonds.
The following are some important terms in bonds and their explanations.
1. Nominal Value or Par Value
The face value or par value is the initial value of the bond when it is issued, which is the value on which the interest and coupon value of the bond are calculated.
For example, if a bond has a face value of IDR 1,000,000 and a coupon of 5%, the investor will receive interest of IDR 50,000 per year.
2. Kupon (Interest Rate)
Coupons are fixed interest rates that investors receive at any given period, usually annually. The amount of interest received by investors is calculated based on the nominal value of the bonds.
For example, if a bond has a face value of IDR 1,000,000 and a coupon of 5%, the investor will receive interest of IDR 50,000 per year.
3. Yield to Maturity (YTM)
Yield to maturity (YTM) is the overall rate of return expected by investors if a bond is held to maturity. YTM includes coupons received over the life of the bond as well as the difference between the purchase price and the selling price at maturity. YTM also takes into account the default risk or credit risk of the bond issuer.
4. Maturity Date
The maturity time is the date when the bond issuer must repay the face value of the bond to investors. At maturity, the investor will receive the face value of the bond plus interest that has been received over the life of the bond.
5. Credit Rating ( Credit Rating )
A credit rating is a default risk rating of a bond issuer given by a credit rating agency. Credit ratings can affect the price of bonds in the market and provide an overview of the ability of the bond issuer to pay interest and principal on time.
6. Interest-bearing Bonds (Fixed-Rate Bonds)
Interest-bearing bonds are bonds with a fixed interest rate over the maturity date. Investors will receive fixed interest in each period and at maturity will receive the face value of the bond plus the interest that has been received.
7. Zero-Interest Bonds
Interest-free bonds are bonds that do not pay fixed interest each period, but are sold at a discount from the face value of the bond. Investors will receive the face value of the bonds at maturity.
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Types of Bonds
Bonds are investment instruments that offer fixed and relatively stable returns for investors. However, like other investment instruments, bonds also have various types that differentiate their risks, characteristics, and potential benefits.
The following are some types of bonds that you need to know.
1. Government Bonds
Government bonds are issued by the government of a country and are considered a relatively safe and stable investment instrument.
Government bonds have a low risk of default because the government is deemed to have the ability to repay the loan. The advantage of investing in government bonds is that the interest generated tends to be more stable and reliable.
An example of a government bond is Government Bonds (SUN) issued by the Government of Indonesia through the Directorate General of Financing and Risk Management (DJPPR) of the Ministry of Finance.
SUN is a popular investment instrument in Indonesia because it has low risk and provides attractive returns. SUN consists of various series with different maturities and interest rates, so that investors can choose the series that suits their needs and risk profile.
SUN can be purchased through licensed banks, securities companies, or non-bank financial institutions. As government bonds, SUN are considered safe and stable investment instruments because they are guaranteed by the state and have a good reputation in the capital market.
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2. Corporate Bonds ( Corporate Bonds )
Corporate bonds are issued by private companies as a funding alternative to bank loans. Corporate bonds offer higher interest rates than government bonds because of the higher level of default risk.
However, corporate bonds are also more vulnerable to fluctuations in market conditions and the performance of the companies that issue them.
Corporate bonds usually have a higher interest rate than government bonds because they have a higher credit risk. Some examples of corporate bonds in Indonesia include:
- PT Bank Mandiri Tbk Bonds : These bonds were issued by one of the largest banks in Indonesia to finance its operational activities. These bonds consist of several series with different interest rates and terms.
- PT Telkom Indonesia Tbk Bonds : These bonds were issued by the largest telecommunications company in Indonesia to finance its business expansion. This bond also consists of several series with different interest rates and terms.
- PT Pertamina (Persero) Bonds : These bonds are issued by the largest energy company in Indonesia to finance operational activities and strategic projects. This bond also consists of several series with different interest rates and terms.
3. Private Bonds
Private bonds are bonds issued by private companies as an alternative to obtain the necessary funding to run their business.
Private bonds often have higher interest rates than government bonds, and are therefore also more risky.
Following are some examples of private bonds that have been issued by private companies in Indonesia:
- Indofood CBP Sukses Makmur Private Bonds : This bond was issued by Indofood CBP Sukses Makmur in 2020 with the aim of obtaining fresh funds in order to develop its business. This bond was issued with a tenor of 5 years and has an interest rate of 7.25% per year.
- Matahari Department Store Private Bonds : These bonds were issued by Matahari Department Store in 2019 with the aim of obtaining fresh funds to support its business. This bond was issued with a tenor of 3 years and has an interest rate of 9.75% per year.
4. Municipal Bonds
Regional bonds are issued by local governments such as districts, cities or provinces as an alternative funding for infrastructure or other development projects. Municipal bonds offer quite attractive interest rates and are sometimes free of income tax.
The following are examples of local government bonds in Indonesia:
- DKI Jakarta Provincial Government Bonds Series A 2015 : These bonds were issued by the Provincial Government of DKI Jakarta in 2015 with the aim of obtaining funds to support infrastructure development and public facilities in Jakarta. This bond was issued with a tenor of 10 years and has an interest rate of 9.25% per year.
- East Java Provincial Government Bonds B Series 2020 : These bonds were issued by the East Java Provincial Government in 2020 with the aim of obtaining fresh funds to support infrastructure development programs and other investments in East Java. This bond was issued with a tenor of 5 years and has an interest rate of 8.95% per year.
- Bali Provincial Government Bonds Series A 2018 : These bonds were issued by the Provincial Government of Bali in 2018 with the aim of obtaining funds to support infrastructure development and social programs in Bali. This bond was issued with a tenor of 5 years and has an interest rate of 8.5% per year.
Local government bonds can be an attractive investment option for investors who wish to obtain a higher interest rate than deposits.
5. Retail Bonds
Retail bonds are bonds issued by the Indonesian government which are intended for retail investors, namely individuals or individuals who wish to invest in small amounts.
Retail bonds have different characteristics from conventional government bonds, where retail bonds have a smaller nominal value, shorter investment period, and higher interest.
Some examples of retail bonds that have been issued by the Indonesian government include:
- ORI Series Retail Bonds: These bonds are usually issued with a nominal value of IDR 1 million to IDR 3 million, with an investment period of 3 to 10 years, and a higher interest rate compared to conventional government bonds.
- Government Sukuk Series Retail Bonds : State bonds are usually issued with a nominal value of IDR 1 million to IDR 5 million, with an investment period of 3 to 10 years, and interest rates based on the profit sharing principle.
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Term of the Bonds
Bonds have different types of terms. You can choose the type of timeframe based on the following two options.
1. Short-Term Bonds
Short term bonds have a maturity of less than 5 years. Short-term bonds generally offer lower interest rates than long-term bonds because of the lower default risk and lower market interest rates.
2. Long-Term Bonds
Long-term bonds have maturities of more than 5 years. Long-term bonds generally offer higher interest rates than short-term bonds because of the higher default risk and higher market interest rates.
Obtainable Benefits of Bonds
Bond investing is an attractive option for investors looking for a steady and stable income. Apart from that, there are several other advantages of investing in bonds that you need to know about, including the following.
1. Fixed Income
Bond investment offers steady income in the form of interest that is generated regularly and reliably. This fixed income provides stability and certainty for investors, especially for those who need passive income for a certain period of time.
2. Portfolio Diversification
Bond investment can be part of portfolio diversification. Portfolio diversification is an investment strategy that involves allocating funds to various types of investment instruments to reduce the risk of loss due to market fluctuations.
Bond investment can assist investors in reducing their portfolio risk because it usually has different risk characteristics than stock investment.
3. Relatively Safe
Bonds are often considered a relatively safe investment instrument because they have a lower default risk than stocks. Government bonds, for example, are considered the safest investment instruments because they are guaranteed by the government.
While corporate bonds carry a higher level of risk, they can still be considered relatively safe because they are usually issued by companies that have stable financial performance.
4. Potential Capital Gains
In addition to interest income, investors can also get capital gains if bond prices rise in the market. This occurs when market interest rates fall, so bond prices rise. Conversely, if market interest rates rise, bond prices fall.
5. Investment Flexibility
Investors can choose bonds with different maturities, both short term and long term. This provides investment flexibility for investors to choose bonds that suit their investment objectives.
These are some of the advantages of investing in bonds that investors need to know. Before deciding to invest in bonds, be sure to do research and understand the characteristics and risks of each type of bond available on the market.
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The difference between Bonds and Shares in Investment
Stocks and bonds are two types of investment instruments that are commonly used in the capital market. Both have different characteristics and have different risks and potential benefits. Here are the differences between stocks and bonds:
1. Property Rights
Shares give investors ownership rights over the company that issued the shares. Investors become part owners of the company and are entitled to benefits from the company such as dividends and capital gains.
While bonds do not confer ownership rights, they do provide the right to payment of interest and return of principal at maturity.
2. Risks and Potential Benefits
Stocks carry a higher risk than bonds because they are exposed to greater market fluctuations. However, stocks also have greater profit potential because the share price can rise significantly.
While bonds carry lower risk and are more stable, the potential return is usually smaller than stocks.
3. Nature of Income
Income from shares comes from dividends paid by the company. Income from dividends is usually not fixed and depends on the company’s performance. Meanwhile, income from bonds comes from interest which is paid regularly and remains during the term of the bonds.
4. Investment Term
Stocks do not have a fixed investment period. Shares can be bought and sold at any time on the capital market. Meanwhile, bonds have a fixed investment period and mature at a certain time.
5. Voting Rights
Stock investors have voting rights in important company decisions, such as electing directors or changing company rules. Meanwhile, bond investors do not have voting rights in company decisions.
Those are some of the differences between stocks and bonds that you need to understand. Before deciding to invest in bonds, be sure to understand the characteristics, risks and potential benefits of these investment instruments.
Bond investment can be a good alternative for investors who want to diversify their investment portfolios and avoid too high risks.
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However, before investing in bonds, you should also pay attention to several important factors such as the background and performance of the bond issuer, as well as economic factors that can affect the value of bonds such as interest rates, inflation and political stability.
This is an article about bonds and information about them. By reading this article, it is hoped that your knowledge about bonds can increase so that you can more easily choose investment instruments that suit your needs .