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This is what a bond is and how to determine its price


Dec 26, 2020
This is what a bond is and how to determine its price

The definition of bonds is the recognition of the debt of the issuing party to the buying party (investor). The bonds show the nominal amount, interest and payment date and other agreements. So that a bond is a written promise to pay a certain amount of money on a certain date in the future and also interest every certain date. Bond buyers can sell back the bonds they have at any time. The sales time can be relatively short or long. So that the bonds purchased can be recorded as short-term or long-term investments. Investment in bonds will provide fixed interest income every period.

Definition of Bonds and the Types

• Guaranteed bonds, namely bonds guaranteed by the company.

The company guarantees the investors that if the company cannot pay its debts, the investors can claim the guarantee. This guarantee is in the form of fixed assets owned by the company (mortgage). The guarantee provided can be several levels, the first level guarantee means having the first claim. Second level guarantee, means that the claim against the guarantee is after the bond with the first guarantee.
Sometimes guarantees can be provided in the form of securities (stocks and bonds) the company owns.

• Unsecured bonds.

Bonds that can be exchanged for shares. This type of bond is also known as a bond that can be exchanged. This exchange is dependent on the wishes of the bond holder. If bonds can be exchanged for shares, investors can change their ownership into shareholders. Therefore, bonds like this attract a lot of investor attention.

• Bonds in the name.

A bond whose interest can only be taken by a person whose name is registered, so that if it is sold, it must be reported to the company that issued the bond.

• Coupon Bonds.

Is a free bond. Each bond is accompanied by coupons as much as the interest payment date. The coupons are used to collect interest. This bond sale does not need to be notified that there is a company that issued it.

How to Determine Bond Prices

The buying and selling price of a bond is not always equal to its face value. The price is determined by the bond interest rate. The bigger the interest, the higher the bond price and conversely the smaller the bond interest, the lower the price. To find out whether the bond interest is large enough or less, compared the percentage of bond interest to the interest rate in the market.

If the percentage of bond interest exceeds the interest rate on the market, the selling price of the bond will be above the nominal value (with agio). But if the bond interest rate is lower than the interest rate on the market, the price will be below the nominal value (with disagio).

Agio or disagio bond is the difference between the bond interest rate and the market interest rate for all bond interest paid. The interest on bonds added or reduced by the agio or diagio that arises at the time of purchase shows the actual yield of the bonds, called the effective rate.

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