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What Are Bonds? This is the #1 Comprehensive Explanation

Learn Bonds investments: the definition of Bonds, Advantages/Disadvantages, and Types of Bonds in detailed explanations.

Overview #

Let’s think about long-term goals already having a job and steady income. Wedding plans, buying a house (with a mortgage), buying a vehicle (with credit), or continuing education (with education savings) are usually things that the average person thinks of as goals to be achieved in the future.

Do not forget and it should not go unnoticed is an investment because investing can help you achieve financial goals in the future. So, the next question is what kind of investment is suitable, and can it be used as an option?

From the amount of investment information circulating, it should be understood that there are seven investment products that can be chosen. The seven investment products include savings, time deposits, mutual funds, bonds, stocks, gold, and property.

These investment products have their own advantages and disadvantages. Therefore, before making a choice, find as much complete information about the investment as possible.

One of the investment products that will be reviewed in the following discussion is bonds. Referring to the existence of Retail State Bonds, Government data shows an increase in bond purchases by investors. These bonds were first issued in 2006, and the number of investors who bought these bonds initially was only 16,561 people in my country. Then the number increased from year to year.

Recently in my country, in 2020 these bonds recorded a record for the highest retail Government Securities issuance since being sold online in 2018, reaching USD1000 million. The sales came from 42,733 investors, with the portion of new investors reaching 23,949 people or 56% of the total investors. The increase in the number of investors indicates that public interest in bond investment is increasing every year.

So, are bonds so attractive that the demand for them tends to increase? What makes bonds attractive? Why do investors want to spend money on their own bonds? A series of questions will be answered through the review below.

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What Are Bonds? #

Bonds are a term in the capital market to refer to a statement of debt from the issuer of bonds to bondholders.

What Are Bonds? Comprehensive Explanation – insurancewhat.com
What Are Bonds This is the Comprehensive Explanation
Bonds Known as Debt Instruments

In short, the issuer of the bond is the debtor and the bondholder is the debtor. In bonds, the maturity of debt payments and the interest (coupon) is written which is the obligation of the bond issuer to the bondholder. For example, the term of the bonds valid in my country is generally 1 to 10 years.

The issuance of the bonds was motivated by efforts to raise funds from the public to be used as a source of funding. When viewed from the point of view of a businessman, bonds can be used to get fresh funds for running a business.

Meanwhile, the State views bonds as a source of funding to finance part of the budget deficit in the State Revenue and Expenditure Budget.

Not much different from stocks, bonds can also be traded. If you want to buy shares, all you have to do is find out on the Stock Exchange, unlike bonds whose buying and selling transactions are not carried out on the IDX. That means the bonds are obtained from the issuer who agrees to make a sale and purchase with the buyer.

No wonder bonds are less familiar than stocks. Take for example the Government as a bond issuer. When the Government issues bonds, investors who are interested in buying them can get them from selling agents. Purchasing through selling agents is a purchasing mechanism determined by the Government. Generally, the Government appoints certain banks, securities institutions, and investment platforms as bond-selling agents.

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Advantages of Making Bonds as Investment #

6 Main Advantages of Bonds Investment

What Are Bonds? Comprehensive Explanation – insurancewhat.com
What Are Bonds This is the Comprehensive Explanation
Investment in Bonds illustration

As an investment instrument, bonds provide a number of benefits to their holders, including:

  • The profits obtained from coupons (interest) are divided into three types, namely fixed coupons and floating/variable coupons. However, there are bonds that do not apply a coupon (zero coupon bond). Bond yields can be large depending on the term of the bond. The longer it takes, the bigger the profit.
  • Profit earned from the difference in bond prices (in percentage) after trading. For example, the starting price of the bond is 100%. When it was about to be sold, the price turned out to be 115%. So, if you sell it, the profit you get is 15% (the term is 15% capital gain).
  • Safe because coupon and principal payments are guaranteed by law in some countries.
  • Coupon/bond interest is higher than deposit interest.
  • Easy to trade in the Secondary Market which is regulated by the Stock Exchange mechanism or transactions outside the exchange.
  • Can be pledged as collateral, such as state bonds.

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Disadvantages of Bonds as Investment #

3 Main Disadvantages of Bonds Investment

What Are Bonds? Comprehensive Explanation – insurancewhat.com

Until now, there has been no investment product that only has advantages without disadvantages. In addition to the advantages, bonds also have disadvantages that need to be considered, including:

  • Bond issuers are at risk of default and as a consequence, investors not only do not make a profit but do not get back the entire principal of the debt. Fortunately, this shortcoming does not apply to state bonds that are protected by law.
  • Vulnerable to changes in interest rates, an unstable economy, and political conditions. These changes have an impact on financial markets.
  • Selling bonds before maturity in the Secondary Market incurs losses for investors. Because the selling price is lower than the purchase price.
Read Also:

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Types of Bonds #

4 General Types of Bonds Investment

What Are Bonds? Comprehensive Explanation – insurancewhat.com
What Are Bonds This is the Comprehensive Explanation
Investment illustration

Bonds have many types that are divided based on the benchmark used. There are ten things that serve as benchmarks for the types of outstanding bonds, namely from the issuer’s perspective, interest payment system, exchange rights/options, collateral, nominal value, calculation of yield, maturity, form, and nature that can be exchanged for shares.

The following are general types of bonds that you need to know:

Conventional BondsRetail Bonds
Namely debt securities that have a large nominal value, approximately USD 100,000 per lot.Namely debt securities that have a small nominal value, for example, USD 100.
Bonds Based on Amount
Corporate BondsGovernment BondsMunicipal Bonds
Types of bonds issued by certain companies, both government and private with a minimum maturity of 1 year.Types of bonds issued by the Government. In my country, this type of bond was first issued in August 2006.Types of bonds issued by the Regional Government with the aim of financing development related to the public interest.
For example, Microsoft issued a bond worth USD 2 million in 2022 with a fixed interest rate (fixed coupon) that has a term of five years.Government bonds are further divided into several types, including Retail State Bonds, Retail Sukuk, Retail Saving Bonds, and Savings State Sukuk.
Bonds Based on Issuer
TypesDefinitions
Zero Coupon BondIt is a type of debt security that has no interest and does not provide regular coupons. Generally, investors will benefit from the difference between the discounted selling price and the initial value when the bonds are traded. The maturity of this type of zero-coupon bond varies, ranging from under one year to more than 10 years.
Coupon BondAre debt securities that provide interest/coupons periodically to investors. Each coupon represents a certain nominal according to the agreement between the bond issuer and the investor.
Fixed Coupon BondsIs a bond that offers an interest rate whose value remains until the maturity of the debt securities arrives.
Floating Coupon BondsIs a bond that offers a coupon that can change in magnitude following the money market index. The minimum coupon limit means that the first coupon set will be the minimum coupon amount that is valid until maturity.
Bonds Based on Interest Payment System
Conventional BondsSharia Bonds (Sukuk)
Namely debt securities issued by certain parties to obtain loans as additional capital by providing interest/yield to investors within a certain period of time.Namely debt securities that provide yields in the form of rent whose calculations are based on Islamic sharia principles and do not contain elements of usury. Sukuk yields are paid periodically within a certain period.
Bonds Based on Yield

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The Conclusion #

Know the Bond Investment Before You Investing.

Identifying bonds and their types, in general, is the first step that needs to be taken before investing. The goal is to understand the investment instruments you have. Especially for bond investment, especially Retail State Bonds, it is now easier to own and can be used as an alternative investment. Moreover, buying Retail Government Bonds can be done online, the capital is affordable, starting from USD 100 in my country, but has a higher profit than deposits.

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