Understanding, Benefits, Types, Risks and Examples of Complete Bonds
Understanding, Benefits, Types, Risks and Examples of Complete Bonds – Bonds are a statement of debt from the bond issuer to the bond holder along with a promise to repay the debt principal along with the flower coupon later on the due date of payment. In general, bonds are issued for a fixed period of more than 10 years.
In summary, bonds are debt but in the form of security. Bond issuers are borrowers or debtors, while bondholders are lenders or creditors and bond coupons are interest loans that must be paid by debtors to creditors. With the issuance of these bonds, it allows the issuer of bonds to obtain long-term investment financing with sources of funds from outside the company.
But do you know what is the difference between bonds and stocks ? Bonds and stocks are financial instruments called securities but the difference is that the shareholders are part of the owner of the company that issues the shares, while the bond holders are only lenders or creditors at the issuer of the bonds. In addition, usually also, the Bond also has a fixed period of time where if it arrives at that time period the bonds can be cashed while the shares can be held forever (except bonds issued by the British government called gilts that have no maturity).
Understanding of Bonds According to Experts
According to Drs. Bambang Riyanto, Bonds is an acknowledgment of debt issued by a government or company or other institutions as a debtor who has a certain nominal value and the ability to pay interest periodically on a fixed percentage basis.
Rahardjo (2003: 8)
According to Rahardjo, Bonds are a product of development from long-term bonds. The main principle of the long term can be reflected in a characteristic or structure attached to a bond. The bond issuer basically makes a loan to the buyers of the bonds issued. The income earned by the bond investor is in the form of interest rates or coupons. In addition to these rules, an agreement has also been arranged to protect the interests of the issuer and the interests of the bond investors.a
Fakhrudin & Hadianto (2001: 15)
According to Fakhrudin & Hadianto, Bonds are securities or certificates that contain contracts between lenders (investors) and those given loans (issuers). So bonds are a sheet of paper stating that the owner of the paper provides a loan to a company that issues bonds.
The benefits of bonds include:
- The bond interest rate is consistent, in the sense that it is not affected by bond market prices.
- The bond holders can estimate the income to be received, because in the contract the contract has been determined with certainty the rights to be received by the bondholders.
- Bond investment can protect the risk of bondholders from the possibility of inflation.
- Bonds can be used as bank credit buildings and to buy other asset instruments.
Types of Bonds
As for several types of bonds or kinds of bonds, including:
Guaranteed Bonds and Unsecured Bonds
Guaranteed bonds are a type of bond that is a mortgage bond, a bond whose issuance is guaranteed by certain guarantees such as real estate. Which includes guaranteed bonds including trust bonds whose issuance is guaranteed by shares or bonds of other companies.
Unsecured bonds are a type of bond whose issuance is not guaranteed by guarantee. These bonds are very risky so that if a company that issues this type of bond will provide a high interest rate to attract potential investors.
Futures Bonds, Serial Bonds and Bonds Can Be Redeemed
Futures bonds are a type of bond that has a maturity date.
Serial bonds are a type of bond that has a serial maturity or gradually.
Bonds can be redeemed is a type of bond that gives the issuer the right to redeem and withdraw the bond before maturity.
Convertible bonds are bonds that can be converted with other securities at the time after their issuance. Usually these types of bonds can be converted into a stock.
Registered and Top Bonds Performance
Registered bonds are a type of bond issued in the name of the owner.
Showable bonds are a type of bond that is not listed by the owner’s name and can be transferred from one owner to another through sufficient submission.
Type of Issuer Based Bonds
Government bonds or government bonds, ie bonds issued by the central government.
Corporate bonds, which are bonds issued by private companies.
Municipal bonds, which are bonds issued by regional governments.
Types of Bonds Based on Payment Systems
Zero coupon bonds, which are bonds that do not require the issuer to pay interest to the holder or in other words free of interest
Coupon bond (fixed coupun bond & Floating coupon bond), which is a bond that requires the issuer to pay interest in either fixed or floating interest.
Types of Bonds Based on Exchange Rights
Callable bond, which is a bond that gives the issuer the right to make a withdrawal or repayment at a certain time.
Putable bonds, namely bonds that give the owner / holder the right to exchange / request repayment to the issuer / issuer.
Convertible bonds, which are bonds that can be exchanged with the shares of the issuer
Exchangeable bonds, which are bonds that can be exchanged with affiliated shares owned by the issuer / issuer
Types of Bonds Based on Guarantees
Mortgage bonds, if guaranteed by real properties (buildings) or valuables.
Collateral trust bonds, if guaranteed by securities (securities, receivables)
Unsecured bond (Debentures), which is a bond that is not guaranteed by assets (valuables)
Secure bonds, namely bonds that are guaranteed repayment with certain assets.
Guaranteed bond, if the guarantor is a third party.
Failed to Pay
The failure of the issuer to make interest payments as well as principal debt at a predetermined time or failure of the issuer to meet other provisions stipulated in a bond contract.
Capital loss is a bond that is sold before maturity at a price lower than the purchase price.
Capability is before maturity, the issuer has the right to buy back the bonds that have been issued. These bonds will usually be withdrawn when the interest rate will decrease. So bondholders who have potentially loss capability requirements, if interest rates decline. To compensate for losses, usually the issuer will provide premium.
American government bonds called Treasury securities, denominated in US dollars and risk-free investments in US dollars. The meaning of risk free is that it is safe from credit risk. However, other risks still remain, such as exchange rate risk for foreign investors, where the value of the US dollar weakens against other currencies. In addition to the inflation risk where the maturity date of the bonds repayment, the value obtained by investors experiences a weakening purchasing power due to inflation greater than the yield obtained. Many governments issue bonds in the inflation index that protect investors against the risk of inflation.