In contrast to the ownership of shares entitling the holder, the bond is actually a loan you give to a company. Bonds are long-term debt securities issued by companies or governments with a nominal value (par / par value) and maturing in particular. Because you are lending money to the company or the government, then the borrower (company or government) will return the loan plus interest over a certain period.
Coupon bonds (coupon bonds) with a fixed interest rate (fixed) during the period of validity is one type of bonds traded in the capital market in Indonesia today.
Bond is a type of long-term investment. Capital must be issued for relatively large investments in bonds for individual investors. The amount is usually traded in units large enough, such as Rp. 5 bln. The validity period of the bond depends on the issuing institution or body, generally between 5 to 10 years. The shorter the duration of the bond means less impact on the level of interest rates. The longer the duration, the more sensitive to interest rate changes. You can sell a bond that you have on others in the secondary market in accordance with the value or the market price before the bond matures.
Changes in bond prices in the market is strongly influenced by changes in interest rates and perceptions of risk. Bond prices in the capital market can be higher or lower than the par value. Investing in bonds not only provide the advantages of fixed interest payment (coupon), but you also have the opportunity to obtain the benefit of the capital gains (the difference between buying and selling prices). A bond can be traded at any time (prior to maturity) at a price that is more or less than the par value, depending on market conditions. Who owns the bonds at maturity will receive repayment of the par value. Bond prices can fluctuate due to several things, such as: the level of interest paid in bonds, the level of certainty of repayment or the overall economic conditions particularly affecting the inflation rate bank rate.
Generally, the value of the coupon will be higher than the deposit rate, but lower than the interest rate of the loan (credit) bank. Bond prices will fluctuate, depending on the magnitude of fluctuations in demand, supply and interest rates in the market. Bond prices negatively correlated with interest rates. Another factor reduction in price of bonds can be derived from the increased risk of the company that issued the bond. The risk of default on a bond is reflected in the ratings (rating) of the bonds.
In the prospectus submitted to potential investors, presented a summary of the facts and considerations important. For example on the articles of association of the company, including the company’s line of business includes the nominal amount and purpose of use. Key data such as the most recent financial statements are attached in their entirety. A short history of issuers and shareholders, company structure, activity and business prospects. At the beginning of the prospectus to be written summary of the public offering that will define the identity of the bonds.
In general, the longer the timeframe, the higher the interest rate offered to cover the additional risk because the investment period is very long. The relationship between the interest rate paid on a bond (short term and long term) with a maturity date or year is called the yield curve (Yield Curve). Yield is exactly what investors get from the menananmkan money in bonds. Most bond column stating the current yield (current) in percentage. Investors use the current yield to compare the relative value of a bond.
YTM (Yield To Maturity) is a way to predict profits in a period of time. YTM calculate bond interest rates are linked to the price, with the difference between the sales price to par value, with the years remaining until the bond matures. YTM value is determined by three things: the amount of payments received on a periodic basis, the acquisition price and the period of maturity.
Typically, bonds issued with the following characteristics:
The maturity date (maturity date) bond, the date set by the borrower to repay their debts. Although there is the due date stated in a bond that does not mean you have to hold the bonds until maturity, because you can retrieval on the bond market.
The interest rate (coupon rate) bonds, ie the interest rate that will be paid to you periodically. The interest rate given can be fixed (interest paid to you is fixed every year) or a floating interest rate (the interest paid will be adjusted periodically).
Nominal value (face value or par value) of bonds that certain amount of money loaned to the company, this amount will be the principal.
As has been said before, the bonds can be issued either by companies or governments.
Government bonds have the highest security level (savereign risk) because the government has the ability to impose taxes and printing money. Bonds issued by the government, commonly known as retail bonds / ORI.
But when you want to decide to choose a corporate bond, choose always from the bonds that are the highest ranked first. The rating reflects the risk of failure to pay interest or principal.
Rating AAA has the lowest risk, and then followed by AA, A, BBB and so on until D indicating that the bonds have been in default (default). In addition to the risk of failure like the one above, there are a few more risks contained in such bonds: interest rate risk, the risk of investment opportunities back (re-investment risk) and others.
Interest rate risk
Bond prices move in opposite directions (negatively correlated) with interest rate movements. When interest rates rise, bond prices fall. Suppose you have government bonds worth Rp. 5.000.000, – with a rate of 10%. You buy the bonds early 2005. However, since 2008 the government issued new bonds with an interest rate of 15%. You receive fixed interest of 10% while others get a higher interest rate from today’s 15%. Thus what price will the investor to offer to you as the holder of the bond? Of course the price will be lower than Rp. 5.000.000, – because the bond you have give a lower interest rate than the interest rate on the bond market. The longer the maturity date of the bond, the higher the interest rate risk that is contained in these bonds due to fluctuations in interest rates higher in the long term.
The risk of inflation
The next risk is the risk of inflation. You have to pay attention to economic conditions from time to time to be able to observe the movement of the rate of inflation. If you look at the inflation is likely to rise, then sell the bond that you hold as soon as possible because if inflation increases, interest rates will also increase. Because if you hold bonds that provide a lower coupon rate, you will lose purchasing power of the interest you receive.
Another risk is the risk of investment opportunities back (reinvestment risk) you can not expect the investment conditions at the time the same as when you buy the bonds first, especially if you buy bonds for the long term, due to economic and political changes can affect the interest rate at the time you want to reinvest the coupons of the bonds. And there are also several types of bonds have a call feature, which means the company issuing the bond is entitled to repurchase (buy-back) of bonds at a certain price (call price) before the bond matures. For bonds denominated in foreign currency (non-rupiah), fluctuation of exchange rate fluctuations of foreign currency makes this risk must be taken very well, so that your investment is protected from losses due to foreign exchange.
Now that you already know about the bond, how and profits bond investment, how the bonds were issued, and the risks of what is contained therein. If you have preferansi moderate risk, you better choose to invest in bonds that provide steady income on a periodic basis.