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What Are Bonds? This is the Definition and the Advantages


Oct 30, 2020
What Are Bonds? This is the Definition and the Advantages

Definition of Bonds Bonds or also known as bonds are certificates or securities containing the recognition of debt by the bond issuer to the investor (lender).

The definition of a bond is a certificate or securities whose contents are a contract between the investor as the bond holder and the bond issuing company which states that the bondholder has lent a certain amount of funds to the bond issuing company. The bond issuing company, as a fund borrower, is obliged to pay an amount of interest periodically according to a predetermined maturity and also pay off the principal when the bond matures.

Bonds payable are generally issued by government and private companies that require funds from outside the company. Bond coupons are the interest rate on bond loans that must be paid by debtors to creditors. In general, bonds are issued at a certain time. Bond loans are generally medium to long term. The average bond in Indonesia has a term of 5 years and a maximum of 30 years. Bonds are a product of the capital market. Not a product of a financial institution such as a bank or non-bank financial institution.

Banks are usually not responsible for all claims and risks that arise from investing in bonds. Bonds are not the object of the deposit insurance program. The bank is only a bond selling agent. Other agreements in the bond may include such as bondholders or restrictions on legal remedies that the bond issuer can take. Bonds are debt but in the form of securities. Just like stocks, bonds payable are transferable. Bonds can be bought and sold in the secondary market like stocks. For issuers, both government and companies, bonds are an attractive funding option because they have a relatively long term and are relatively cheap.

From an investor’s point of view, when investing in bonds. It will look similar to an investment on a bank deposit. Investors will earn interest (coupons) regularly. Generally given every three (3) months, six (6) months or one (1) year up to a predetermined time period.
Bonds Advantages?

Companies and investors will benefit from bonds.

For companies, bonds are clearly profitable by obtaining company funds that will be needed for operational activities and for developing company expansion. Bonds and stocks are often the main consideration of financial management in getting company funding sources. There are several advantages when management decides to choose to issue bonds over stocks. Among others :

• The issuance of bonds does not interfere with the controlling rights of shareholders because the bondholders are creditors. Do not have voting rights in the company.
• Bonds can save taxes. Bond interest is a company expense that can be a tax deduction.
• Earning Per Share (EPS) is higher because there are no new shares issued.

Benefits for Investors?

1. Interest

Bonds provide interest income for investors. This interest is generally referred to as a bond coupon. There are 2 types of coupons in bonds. Fixed coupons (fixed coupons) and floating coupons (floating coupons) Bond coupons are generally higher than bank deposit rates. The company that issues the bonds is obliged to pay interest to the bond owner of the company. Because basically bonds are LETTERS OF DEBT. Since bonds are debt, they have another privelage. That is, it becomes a priority for repayment when compared to other instruments such as shares. Although bonds are debts. However, in certain cases there are bonds that do not pay interest. Zero Coupon Bond.

2. Easy to sell.

Bonds are easy to buy and sell or trade in the secondary market.

3. Capital Gain

Capital gain is the profit obtained from the difference in bond prices when the bonds are traded. For example, suppose the initial bond price is 100%, and when the bond is going to be sold, the price increases to 120%. If the bonds are sold, the owner of the bonds will get a profit of 20%.

4. Safe

Bonds are a safe investment because the payment of interest and principal has been regulated in laws and regulations.

Generally, those who issue bonds are companies that need additional money for business development. In addition, the government can also issue bonds. We hear more about the bonds issued by the government.

Here are the parties who usually issue bonds.

• Government
• Supranational institutions. For example the European Investment Bank
• Government agencies. Generally called agency bonds
• Private companies
• Special Purpose Vehicles. A company that aims specifically to control certain assets. The objective is to issue bonds called Asset Backed Securities

Types of Bonds

Several types of bonds issued by the government in Indonesia are, for example, as follows:

• Bonds Recap. Bonds aimed at the Banking Recapitalization Program
• Bonds that aim to cover the state budget deficit. These bonds have small numbers so they can be purchased at retail.
• Government Securities Retail Bonds, the goal is to cover the state budget deficit

In private companies, there are several types of bonds that are commonly issued.

• Secure and Unsecured Bonds, Secure bonds are bonds that have a guarantee for certain company assets such as land, factories, buildings. Meanwhile, unsecured bonds are bonds issued with general credit by the issuer.
• Term and Serial Bonds. Term bonds are bonds that have a specific term in the future. Serial Bond is a bond that is paid in installments.
• Registered and Bearer Bonds. Registered bonds are bonds issued using the name of the owner. Bearer bonds are bonds that are registered / registered. Bond bearer holders must use a coupon in receiving interest payments.
• Convertible and Callable Bond. Convertible bonds are bonds that can be converted into ordinary shares of a company. Callable bonds are bonds that can be drawn in a certain amount before the bonds matures.