Bond investment is one of the most popular investment instruments and is in great demand by Indonesians. With its system of buying and selling debt securities, these investments are categorized into several types based on the issuing institution.
According to the institution that issued the bonds, this investment consisted of Government Bonds investment, Corporate Bonds investment, and Regional Bonds investment. Meanwhile, if you look at the type of interest payment, the Bond investment instruments are divided into 4 categories, namely coupon Bonds, zero coupon Bonds, fixed coupons, and floating coupons.
If you are interested to start investing in this instrument, there are a number of things you need to know beforehand. Things that can help you understand this investment instrument include various commonly used terms, the mechanism of Bond issuance, to the process or flow of buying bonds.
For this reason, this article will discuss these three important points to help you get to know this Bond investment instrument. Further explanation will be discussed in the following points.
Common Terms in Bond Investment
One way to get to know the ins and outs of Bond investment is by learning the various terms that are usually used within the scope of these investment instruments.
As with other investment instruments, there are also terms that have special meanings in this Bond investment and are commonly used.
Here are some important terms you need to know to start exploring Bond investing. These terms include:
- Issuer
In the scope of Bond investment, the issuer is the party that issues the notes or Bonds. As previously mentioned, issuers of these debt securities can be classified into government, corporations, and regions.
The issuer can be said to be a party that has debt to investors who buy debt securities or Bonds. So if you are interested in buying Bonds, the first thing you need to know is the details regarding the issuer.
You can find out whether the Bond issuer can repay the outstanding amount specified in the initial agreement.
To simplify the checking process, you can check the rating or rating of the issuer that has been compiled by Pefindo (PT Pemeringkat Efek Indonesia) in order to assess whether the issuer can be trusted and has good financial condition, so that later it can pay back the debts to investors.
- Coupons or Interest
The next term is related to the interest used in the scope of Bond investment, namely coupons. Similar to interest in general, coupons on Bond investments also need to be paid by the issuer to investors with a predetermined amount.
But instead of being paid all at once, these coupons are paid in a certain period, such as being paid in a period of three months or every six months.
In Bond investment, the common type of interest rate or coupon is a fixed coupon or floating coupon. The first one can be defined as a coupon with fixed interest rate that is always the same or is determined based on the agreement, while for the other type, the coupon will depend on the market-adjusted interest rate.
- Nominal Value
Then there is the term nominal value. This term is defined as the principal value or amount that will be received by the investor buying the Bond when it is due.
- Maturity
Maturity time, namely the time when the issuer must pay the nominal value that has been purchased by Bond holders.
This maturity has various time variations, but generally ranges from 1 year to 5 years.
- Trustee
The trustee is the party that represents the Bond holders. Having an important role, the trustee's duty is to protect the Bond holders from experiencing significant losses.
In addition, the trustee will also provide important information to the Bond holders relating to the latest developments from the issuer.
- Asset Claim or Income Claim
This term is usually used when the issuer goes bankrupt and is unable to repay the nominal value to the Bond holders. When this happens, the issuer must sell the assets they own. The proceeds from the sale of these assets are given to the Bond holders. This process is known as asset claims.
- Indenture or Contract
Indenture in the scope of Bond investment has the meaning of a contract agreed by two parties, namely the issuer and the representative of the Bond holders or trustee.
The contract between the two parties contains the rights and obligations of the party issuing the Bonds and the party holding the Bonds. The purpose of this contract arrangement is as a form of protection for the Bond holders.
- Rating
The rating refer to the level of Bond risk. The higher the rating, the smaller the risks that may be experienced, and the lower the interest or coupon amount, and vice versa.
The rating will be determined by an institution that is specifically devoted to this rating process. Of course, in determining a ranking, there are things that influence it, such as profit to the level of income certainty.
- Current Yields
The next term is current yield. Current yield is the profit earned and received by the Bond holders within a period of one year based on the Bond price.
- Liquidity Risk
Is a term or designation for one of the risks that may be experienced by Bond holders. Liquidity risk is the risk that makes Bond holders unable to sell or buy a certain amount of investment as long as the investment is ongoing or has not yet matured.
- Default Risk
Meanwhile, default risk is the risk experienced by Bond holders when the issuer does not have the ability to pay the coupon or principal value of the Bonds when the investment is due.
Bond Issuance Mechanism
After knowing the meaning of each term that are commonly used in the scope of Bond investment, the next step to better understand this investment instrument is to study the mechanism of issuing a bond.
In general, these Bonds are initiated when an institution requires a certain amount of funds for certain needs. Then the institution will issue bonds to fulfill the needs.
However, what is the method or mechanism for issuing the Bonds? Bond issuance mechanisms that are generally carried out include the following.
- Auction
As the name implies, the auction mechanism in issuing Bonds is carried out by letting potential investors offer or submit a price for a Bond.
This auction process is carried out only to determine the price of the Bonds until they mature, while the profits in the form of coupons are usually determined by the debtor.
- Emissions
The second Bond issuance process is carried out by transacting in the money market. Then institutions ranging from financial institutions to securities firms form a syndicate to buy all the Bonds issued by the issuer which will then be sold to general investors.
- Special Publishing
The next Bond issuance mechanism is by way of special issuance. When this mechanism is implemented, the issuer only sells the debt securities or Bonds to certain parties instead of selling them freely.
This special issuance mechanism is carried out when the issuer is in need of fast funds.
Bond Purchase Flow
Getting to know Bond investment will not be complete if you do not understand how the flow or process is carried out in purchasing a Bond. For those of you who are really interested in this investment, you must know the information below.
The flow in purchasing Bonds is as follows.
- Open an Account
The first step you need to take to be able to buy a Bond or become a Bond investor. You do this by opening an account to channel funds from the investment that you will make.
In opening this account, you must be careful in choosing a securities company that is experienced in dealing with buying and selling bonds. Account opening is also carried out with the aim that you will find out various kinds of information related to Bonds accurately and up to date.
- Understand Bond Products
Then after opening an account, you need to understand Bond investment products in detail, starting from the potential benefits to the possible risks.
- Perform Analysis
After understanding Bond products, you need to do an analysis of matters related to Bonds, starting from analysis of coupons, Bond ratings, to the Bonds maturity period.
This analysis is carried out so that you can draw conclusions and determine whether debt securities or Bonds issued by these institutions will provide benefits or not.
Making this decision will be better if you conduct an analysis of similar Bond products and compare them to one another.
- Give Purchase Orders to Traders
The next stage after you have found the bonds to buy is to give orders to the traders that you have appointed. Then the trader will continue the process by buying Bonds according to your instruction.
- Prepare Investment Funds
After the mandate is delivered, then you need to prepare the investment fund. In this case, it is highly recommended to avoid late payment. If this happens, you may be penalized.
- Complete Payment
The final stage is completing the payment. Bond payments are usually made using a transfer through a securities company account.
Interested to Invest in Government Bonds? Choose DBS Treasures as Your Partner
After getting to know Bond investment by understanding the terms, the issuance mechanism, and the Bond buying process, are you interested to invest in this instrument?
If you are interested to invest in Government Bonds, then you need to find the right issuer and partner who is ready to guide you, so that you can confidently start investing in Bonds and gain a satisfying profit.
DBS Treasures can be the answer you are looking for when looking for a partner in investing. For those of you who are interested to invest in Government Bonds with priority banking DBS Treasures, you can find complete information here.
