When you want to invest, you will be faced with various types of instruments that you can choose from, such as Bonds. Bonds are often discussed among investors because they have characteristics that other investment instruments do not have. But before you start investing, you must know the various types of Bonds first.
Apart from that, of course you also have to understand the meaning and workings of Bonds so that you can make more informed decisions when investing. Therefore, see the full explanation below.
Definition of Bonds
What do you know about Bonds? Bonds are debt securities issued by various institutions, such as corporations to the government. The issuance of this Bond is intended for the institution to obtain funding in the medium or long term. Investors will also receive returns in the form of coupons on a regular basis.
Bonds are still considered a safe investment because they have a relatively lower risk than other instruments. In addition, the periodic coupons allow investors to obtain a fixed income as well. The growth rate of the investment value is considered quite stable.
Various Bonds in Indonesia
There are various types of Bonds in Indonesia based on the issuing institution that you can choose for investment. Here's the explanation:
- Government Bonds
Government Bonds are Bonds issued by the central government or the state. The aim is to obtain state development funds which will be managed through the APBN. These Bonds are protected by laws and regulations issued by the central government.
Due to the protection provided, Government Bonds have less risk and therefore tend to be safer. One example is the chance of default will be smaller. Therefore, many investors choose this Bond, including novice investors.
Every year, the central government will offer a variety of Bond products to the public. Examples of these products are SBR which stands for Savings Bond Ritel and ORI or Obligasi Negara Ritel.
Even though both are still products of Government Bonds, ORI and SBR have various differences. Here's a brief explanation:
- The type of ORI coupon is a fixed rate. Thus, the interest rate that will be obtained by investors is fixed. However, the type of coupon that SBR has is floating with floor, which means it can change according to BI interest rates but still has a minimum limit.
- The ORI tenor is 3 years. So, investors will regain their principal investment at that time. Meanwhile, the SBR tenor is 2 and 4 years.
- ORI can be traded on the secondary market, unlike SBR. However, SBR has an early redemption feature that allows early redemption under certain conditions before maturity.
- Regional Government Bonds
As the name suggests, Regional Government Bonds are Bonds issued by local governments. Similar to Government Bonds, this type of Bond is also issued so that local governments obtain funds from the public for the development of the area concerned.
- Corporate Bonds
Even though they are both from corporations, Corporate Bonds are different from stocks. This is related to the meaning of the Bond itself, which is in the form of debt securities. This type of Bond can be issued by various private and state companies.
Corporate Bonds have quite unique characteristics, namely having a shorter tenor than other types of Bonds. However, Corporate Bonds are often considered to have a higher risk, such as the risk of default.
This risk may not necessarily occur because it depends on the market, the company, and the political conditions in the company's country of origin.
Here's How Bonds Work That Need to Be Understood
So, how do Bonds work? Below are each of the points regarding the workings of the Bond along with a brief explanation:
- Issuance of Bonds
The process begins when institutions need funds from the public for several purposes, such as state or regional development, new projects, corporate management, and debt financing.
There are several ways that institutions can choose to issue Bonds, namely:
- Auctions, namely various financial institutions and banks will submit bids for Bonds issued by the government. The yield that will be obtained by investors has been determined from the start, but the price of the Bonds depends on market prices.
- Underwriting, namely all Bonds issued by an institution will be purchased by banks, securities companies, or other financial institutions. These institutions have formed a certain group to resell the Bonds to the public.
- Special issuance, in which an institution will issue Bonds to certain parties so that they are not traded freely.
- Coupon Payment
After investors buy and manage to own a Bond, they will get a coupon. Bond coupons are interest that will be obtained by Bond owners periodically because they have provided loans to the Bond issuer. Coupon payments will depend on the coupon rate.
- Initial Price with Market Price
In general, the Bond issuer will set the initial price of the Bond when offering it for the first time. Then there is also the actual market price. What's that?
The market price is a price that has been influenced by various factors, such as the tenor period, the creditworthiness of the issuer, to the coupon rate held by the Bonds compared to the current interest rate.
- Sale of Bonds
Some Bonds have the advantage of tradability among investors. That way, investors do not have to hold the Bonds until the tenor time.
Usually, Bonds will be purchased when interest rates are falling or creditworthiness levels are rising. In addition, Bonds can also be reissued at a lower cost.
- Early Redemption
Some Bonds, such as the SBR, do not require investors to wait for the investment value to be repaid at maturity, because they can apply for early redemption.
But usually, there are certain conditions as previously mentioned. For example, SBR Bond owners can only submit an early redemption of a maximum of 50% of the investment value.
Invest With DBS Treasures
Above you already read through the various types of Bonds in Indonesia and how they work. If you are interested in investing in Bonds, especially Government Bonds considering the small risk, then you can make DBS Treasures priority banking as your partner. You will also gain various benefits, namely:
- You can gain Bond coupons periodically during the investment period by the Bond issuer
- There is an opportunity to get capital gains
- The coupon rate is still above the interest for Fixed Deposits in general
- No additional costs required
- Bond transactions are easy to do anytime and anywhere via the digibank by DBS Application
- Gain insight according to market data analysis and risk profile, so you can confidently invest at the right momentum
Therefore, invest in Government Bonds with DBS Treasures now. If you need further information, please visit the following page https://www.dbs.id/id/treasures/investasi/structured-product/investing-in-bonds.
