Bonds are popular investments due to their low risk and high stability. These instruments are often chosen for long-term financial goals and diversification purposes. In Indonesia, bonds have maturities ranging from 1 to 10 years, with a minimum term of 5 years.
Within the realm of bond investments, there are different types, one of which is the zero-coupon bond. This type of bond distinguishes itself from conventional bonds in several ways. Let's explore how zero-coupon bonds work!
What Is a Zero-Coupon Bond?
Zero-coupon bonds may be familiar to many investors. While traditional bonds typically pay periodic interest or coupons, with this type of bond, investors do not receive any coupons. It is an instrument used for financing the national budget (APBN). The government issues these debt securities to fund the budget. In this investment type, the investor's funds remain invested for a long period of time.
As the name suggests, a zero-coupon bond is a debt instrument where interest is not paid until the maturity date. This type of instrument is more suitable for long-term investments. Investors receive their investment principal and the accumulated interest at maturity.
To issue these bonds, certain conditions and factors need to be met. These include a relatively stable market environment, high demand for this instrument, and the performance of the bond issuer.
How Does a Zero-Coupon Bond Work?
It's important to note that zero-coupon bonds are typically traded at a high discount. However, investors will still receive the original face value of the bond at maturity. Therefore, the profit from the bond is derived from the initial purchase price discount.
For example, let's consider a zero coupon bond with a face value of Rp100 million. The bond is sold at 80% of its face value. In this case, the investor only needs to invest Rp80 million.
So, where does the profit come from? As explained, when the bond reaches maturity, the investor will receive the principal amount according to the original face value of the bond, which is Rp100 million. Therefore, the investor will receive a return of Rp100 million. The difference between the purchase price and the return value becomes the profit, which is Rp20 million.
Hence, this type of investment is highly advantageous for those seeking long-term goals. It provides a clear return on investment. Additionally, this investment option can be considered for education planning and retirement funds.
Advantages of Zero-Coupon Bonds
After understanding how zero-coupon bonds work, it's important to know their advantages. Compared to other investment instruments, zero-coupon bonds offer the following benefits:
● Clear Return Prediction
This investment type provides a clear prediction of returns. As explained earlier, the profit is obtained from the initial purchase price discount. The certainty of the return value allows you to plan your finances more accurately.
● Higher Interest Rates
While zero-coupon bonds do not pay periodic coupons like regular bonds, it doesn't mean that the profits earned will be reduced. Interestingly, zero-coupon bonds offer higher interest rates. Typically, there is a difference in interest rates compared to other instruments. Although the specific value of the difference is uncertain, it will contribute to the overall profitability.
● High Liquidity
Zero-coupon bonds have good liquidity, meaning they are easily tradable. Many investors actively buy and sell these bonds, indicating that you won't face difficulties when deciding to sell them.
● Long-Term Investment Option
Zero-coupon bonds are suitable for those who desire a fixed value in the future. They can be used for specific purposes such as weddings, education, or retirement funds. With a stable and fixed value, these instruments are widely sought after by investors.
Disadvantages of Investing in Zero-Coupon Bonds
Despite having many advantages, there are always risks associated with any investment. To ensure your investment runs smoothly, let's explore the explanations of these risks.
● Market Value Dependency on Interest Rates
It's important to note that bonds have an inverse relationship with interest rates. If interest rates rise, bond prices will decline. This can be a significant concern for investors planning to sell their assets.
● Risk of Rule Changes and Default
Regulations regarding bonds, especially government bonds, can change at any time, which can impact your investment. For example, tax rates may change. Additionally, there is a risk of default, where the issuing entity (government or company) is unable to fulfill the agreed-upon repayment of principal and interest. However, default risk is rare in zero coupon bonds.
Investing in Bonds with DBS Treasures and Receive Various Advantages
Investing should be done with the best strategy in mind. You can trust DBS Treasures for this, as they offer various advantages:
- Regular Coupons
DBS Treasures provides the benefit of regular coupon payments that are paid periodically during the investment period in the selected bond issuer.
- Potential for Capital Gain
Some types of bonds can be sold at any time, even before the predetermined maturity date. In addition, investors have the potential to profit from the increase in bond prices.
- Competitive Coupon Rates
DBS Treasures offers competitive coupon rates that are above the average fixed deposit interest rates.
- No Additional Cost
Investors are not charged any additional fees. There is only a spread or difference between the buying and selling price (bid and offer).
- 24/7 Transactions
You can enjoy a variety of bond products that can be bought and sold through the digibank by DBS Application. It's quite convenient, isn't it?
Other than the above advantages, with DBS Treasures, you will have access to curated market analysis from a team of financial experts who will communicate it to you. You will also receive real-time opportunities tailored to your risk profile and portfolio needs, powered by Artificial Intelligence/Machine Learning (AI-ML). Your investment planning will be supported with curated solutions related to investment (Grow) and insurance (Protect), allowing you to quickly and confidently invest through your preferred media.
For a more detailed information about bond investments, you can access it here. Ensure that your investment runs smoothly and conveniently with DBS Treasures!
