• Fri. May 27th, 2022

Which Bond Type Is Right For You?


Oct 9, 2020
Which Bond Type Is Right For You?

For you beginner investors, it is very important for you to know the types and types of investments that suit your needs and tastes in investing.

Currently, there are many choices for people to invest, including; in the form of foreign currency (forex), property, gold, or in the form of stocks, mutual funds or bonds.

Well, for those of you who like investing in the form of fixed income or bonds, it is necessary to first understand what is meant by bonds.

Each bond contains the nominal value of the bond and the bond interest rate. The face value or par value is the value that shows the amount that the company must pay when the bonds matures. Meanwhile, the bond interest rate shows a certain percentage that must be paid periodically to bondholders.

It was explained that companies that issue bonds are usually caused by the need for large amounts of funds that cannot be met from the accumulated retained earnings or from bank debt. Because these bonds have a maturity period of more than one year (usually between 5 and 20 years), if the company issues bonds it will generate bond debt. This debt is classified into long-term debt.

The following are the types of bonds, among others;

Guaranteed bonds and unsecured bonds

Classified as secured bonds are: Mortgage bonds, which are bonds whose issuance is guaranteed by certain guarantees such as real estate. Included as guaranteed bonds are trust bonds whose issuance is guaranteed by shares or bonds of other companies.

Meanwhile, unsecured bonds are bonds whose issuance is not guaranteed by a guarantee. These bonds are very risky so that if the company issues this type of bond, it will provide a high interest rate, in order to attract potential investors.

Term Bonds, Serial Bonds and Redeemable Bonds

Term bonds are bonds that mature on one date. Serial bonds are bonds that mature in serial or in installments. Redeemable bonds are bonds that give the issuer the right to redeem and withdraw the bonds before maturity.

Convertible Bonds

Convertible bonds are bonds that can be converted to other securities at a time after its issuance. Usually this type of bond will be convertible into stocks.

Registered and Top Performance Bonds

Showcase bonds are bonds that are not listed by the owner’s name and can be transferred from one owner to another by simply submitting.

Government Bonds

Generally, fixed income documents can be classified based on the time before maturity or maturity.

In this case, there are 3 main categories namely;

Bills; these debt securities will mature in less than 1 year. Notes; these debt securities will mature in 1 to 10 years as well as Bonds; these debt securities will mature more than 10 years.

Securities that can be traded by the government are known as treasuries, which are usually known as Treasury Bonds, Treasury Notes, and Treasury Bills (T-bills).

Technically, T-bills cannot be called bonds because of the short maturity of the letter.

Municipal Bonds

Municipal bonds, or what are known as ‘munis’, are the next in the line from a risk perspective. It is rare for a city to go bankrupt, but it can happen rarely. The main advantage of the “munis” is that the profit or return that will be returned is federal tax free. Also, local governments can make their bonds tax free, thus making municipal bonds completely tax free. Since it is a tax savings account, the maturity period of the ‘munis’ is usually lower than that of taxable bonds. Depending on your situation, these notes can be a great way to invest.

Collective Bonds (Corporate Bonds)

A company can make bonds just like forming stocks. Companies that are large enough have the flexibility that is high enough to manage the amount of debt they are willing to make, in the short term joint notes with a maturity of less than 5 years; medium-term around 5-12 years, and long-term around more than 12 years.

Combined debt securities are characterized by high yields due to the relatively high risk of a company compared to the government. But on the bright side, the high yield from this investment is arguably quite beneficial for investors. The quality of a joint company is very important in this case, because if the quality of a company is already high, then it would be nice if we know the quality of a company that we are investing in.