Pay Attention to These 9 Important Points Before Investing in Bonds

Key points:

• Bond investment has relatively low risk, making it suitable for beginners.
• The way bonds work is quite easy to understand, starting from issuance, sales process, coupon payments, principal returns to trading in the secondary market
• Choosing to invest in bonds has many benefits, such as fixed income, return of principal, protection from inflation, and liquidity that can be used in emergencies.
• Investing in bonds on a trusted platform such as digibank by DBS App can support successful investing

Want to start your investment journey with more confidence?

When starting an investment journey, Sahabat digibank certainly want to find profits from the investment made. For beginner investors, bond investment can be the best choice as it has low volatility but a relatively high level of security compared to stock investment. To choose a good and safe bond product, you need to pay attention to several important factors. Check out the explanation below!

What is a bond?

Bond investment is one of the financial instruments used by companies, governments, or other entities to raise funds from investors. Bonds are in the form of debt securities that state that the bond issuer promises to pay back a certain amount of money to the bond holder on a predetermined date in the future, as well as pay interest periodically during the term of the bond.

Bond products have several important components, namely the issuer, face value, coupon, maturity date, and bond price.

How Bonds Work

Here's how bond investment works in detail.

1. Bond Issuance

The issuer will issue bonds to obtain funds to finance projects or operational needs. The issuer determines the nominal value of the bond and the interest rate (coupon) that will be paid to bondholders periodically. It also determines the maturity date to pay back to bondholders.

2. Selling Process

Bonds are sold to investors through the primary market, with the help of investment banks or other financial institutions acting as underwriters.

3. Coupon Payment

Bondholders receive periodic interest payments based on a predetermined coupon rate. For example, if the coupon rate is 5% and the face value of the bond is IDR 100 million, the bondholder will receive IDR 5 million annually or IDR 2.5 million every six months, depending on the coupon payment frequency.

Coupon payments come from the operating income of the bond issuer, be it from the sale of products, services, or other sources of income.

4. Maturity and Principal Return

At maturity, the bond issuer will pay back the face value of the bond to the bondholder. For example, if the face value of the bond is IDR 100 million, the bondholder will receive IDR 100 million on the maturity date.

5. Secondary Market Trading

Bonds can be traded in the secondary market. Investors can buy and sell bonds through the stock exchange or over-the-counter (OTC) market. If the bond is sold before its maturity date, the investor may earn a capital gain or incur a capital loss depending on the selling price of the bond in the secondary market compared to its purchase price.

Why Should You Buy Bonds?

Here are some reasons why you should make the wise choice to invest in bonds.

1. Fixed Income

Bonds offer a steady income generated from coupon payments. This fixed income provides a stable source of income for investors, especially for those of you looking for passive income or retirement funds.

2. Certainty of Principal Return

At maturity, the bond issuer will pay back the nominal value of the bond to the bondholder. The certainty of returning the initial capital makes bonds considered very safe because they are supported by the full power of the issuing government to repay the debt.

3. Portfolio Diversification

Adding bonds to an investment portfolio can help diversify risk. Bonds provide greater stability than stocks, especially in volatile market conditions.

4. Protection against Inflation

There are certain types of bonds whose value is adjusted for inflation. Coupon payments and principal value will increase in line with inflation, thus providing investors with purchasing power protection against price increases.

5. Liquidity

Bonds can be traded on the secondary market, giving investors the flexibility to sell bonds before maturity if needed. You can access funds faster in emergency situations.

6. Lower Risk than Stocks

Bonds provide a more stable income than stocks, whose prices can fluctuate greatly. In the case of a company liquidation, bondholders have a higher priority for payment than shareholders. This means the risk of losing your entire investment is lower with bonds than stocks.

Types of Bonds

Bond investment is an investment product with different types, characteristics, and benefits. Here are the types of bonds that you need to understand.

1. Primary Market Bonds

Bonds offered for the first time to the public (Initial Public Offering or IPO) are sold at a price according to the value offered. Purchases of these bonds can only be made within a certain period of time.

Not all bonds from the primary market can be traded again in the secondary market. These bonds generally have a period of 2 to 3 years, and some products such as SBR & ST cannot be traded again. You can buy this bond investment only on the digibank by DBS Application which has been proven safe and reliable.

2. Secondary Market Bonds

Secondary Market Bonds can be bought and sold at any time before maturity with other investors. Generally, these bonds have a longer maturity, between 5 to 50 years. Their principal value follows changes in market prices, providing an opportunity to profit from the price difference. The price of these bonds is determined by market conditions when the transaction is made. Well, digibank Friends can also buy these bonds on the digibank by DBS Application.

Important Points to Consider Before Buying Bonds

Before buying bonds, there are some important points that you need to consider to ensure that the investment you make is in line with your financial goals and risk profile.

1. Investment Objective

Determine your investment goals for the short term or long term. Bond investments with longer maturities usually offer higher interest rates, but also greater risks.

2. Risk Profile

Evaluate the credit risk of the bond issuer. Check the credit rating of the bond given by the rating agency. Bond prices are inversely proportional to interest rates; if interest rates rise, bond prices in the secondary market tend to fall, and vice versa. Also consider the impact of inflation on the purchasing power of coupon income and the principal value of the bond at maturity.

3. Interest Rate (Coupon)

Bonds with fixed coupons provide the same coupon payment throughout the validity period. In contrast, bonds with floating coupons adjust to changes in market interest rates. Pay attention to the yield to maturity (YTM), which shows the total return expected if the bond is held to maturity, including interest and capital gains or losses.

4. Term and Maturity

Bonds of less than three years have lower interest rate risk but also offer lower yields. Longer-term bonds of more than ten years offer higher yields but have greater interest rate risk. Adjust the maturity date of the bond to your liquidity needs. Make sure you don't need to access the funds before maturity to avoid potential selling losses in the secondary market.

5. Liquidity

Actively traded bonds are easier to sell if you need funds before maturity. Pay attention to the spread between the buying price and the selling price. Wide spreads can indicate low liquidity and can reduce profits if the bond is sold before maturity.

6. Diversify

Diversify your bond portfolio to reduce risk. Mix primary and secondary market bonds or other types to get a more balanced combination of risk and return.

7. Tax Structure

Some bonds, such as municipal bonds, usually offer tax benefits such as local income tax exemption in some countries. Check the tax implications of the bond product you want to buy.

8. Fees and Commissions

Pay attention to transaction fees charged when buying or selling bonds through a broker or trading platform. Also pay attention to the management fees charged by the investment manager.

9. Read Bond Documents

Read the prospectus and bond offering documents to understand the specific details of the investment, including terms and conditions, risks, and issuer strategies. Consider consulting a team of investment experts before making a decision to buy bonds, especially if you are a beginner investor.

Want to start investing in bonds with more confidence? With digibank by DBS App, you can get a better investment experience. You can access macroeconomic forecasts from a team of world-class experts. There are more than 120 products curated by Invofesta to navigate your investment future, even in times of interest rate fluctuations.

Through 24-hour access, you will also get investment recommendations, market condition reports, risk profile reports, and can discuss your financial plans with digibank Advisor. Personalized service from a team of certified experts led to the digibank by DBS App being voted the World's Best Investment Bank by Global Finance. Every product recommended can increase your investment returns!

Let's realize your investment experience with digibank by DBS! Check out our bonds and other investment products here.