Know Your Bond

Introduction to Bonds

Bonds is a term used in the world of finance which is a statement of debt from the bond issuer to the bondholders and its promise to repay the capital andinterest coupons will be at the due date of payment. Other provisions may also be included in the bonds such as the identity of the bondholders, the limitations on legal action taken by the publisher. Bonds are generally issued for a fixed term of over 10 years. For example, on government bonds Americans called the "U.S. Treasury securities "issued for maturities of 10 years or more. First term of the debt up to 10 years old called "fixed income" and debt under one year is called "Letters of Treasury. In Indonesia, the first term of the debt up to 10 years issued by the government called the Government Securities (SUN) and debts under one year Letter issued by the government called the State Perbendaharan (NES).

In short bonds is the debt but in the form of security . "Publisher" is an sipeminjam bonds or the borrower, while the "holder" of the bonds is a lender or lenders, and "coupon" bonds is the interest on the loan to be paid by the debtor to the creditor. With this bond issuance will be possible for the issuer to obtain financing investment with long-term source of funds from outside the company .

In some countries, the term "bond" and "debt securities" is used depends on the maturity period. Market players typically use the term bonds for the issuance of debt securities in large quantities offered widely to the public and the term "debt" is used for the issuance of debt securities in small-scale sejmlah usually offered to small investors . There are no clear restrictions on the use of this term . There is also a well known term "treasury note" which is used for fixed-income securities with a maturity period of three years or less. Bonds have the highest risk compared with the "debt securities" that have medium risk and the "treasury note" that the lowest risk memiliko where visits from the "duration" bonds which have a shorter duration and lower risk.

Bonds and stocks are both a financial instrument called security but the difference is that the owner of the shares is part of the owner of the issuer company stocks, while bond holders are just a lender or lenders to the issuer of the bonds. Bonds also usually have a set time jangja which arrived after that time period while the bonds redeemable shares can be owned forever (except in bonds issued by the government of England , called gilts that have no maturity.

Bonds Gain:

The first advantage is to provide fixed income (fixed income) in the form of coupons. This is the main characteristic of the bonds, in which bondholders would receive interest income on a regular basis during the time of the bond. Flowers bonds generally offer higher interest than a given deposit or SBI. The second advantage is the gain on the sale of bonds (capital gains).
In addition to income in the form of coupon, bond holders can also be traded on bond. Therefore, if you sell higher than the price when you buy it, then you as the holder of the bonds obtained difference is called capital gains.

Bond Risk:

1. Liquidity Risk

This risk is inherent in all bonds, government bonds and corporate bonds. This risk arises from the possibility of no liquid a bond is not easily traded or sold a bond in the secondary market. Secondary bond market is not as busy as the secondary stock market. If the stock market alone there are an illiquid stock, especially in the bond market. For the same two bonds karektiristiknya except that one of the other liquid and illiquid, investors will ask for additional interest rate for bonds that are not liquid or liquidity risk premium, the term default. A bond becomes illiquid secondary market if the demand for bonds bought it quite a lot, or indeed there are parties who act as market maker in which one function is as a buyer and seller stand-by for the bonds.

2. Risk Maturity

These risks also exist in all but particularly in bond and corporate bonds with a maturity of related bonds. In general, the longer the maturity of a bond, the greater the degree of uncertainty so that the greater the risk of maturity. Risk maturity of the bonds (government and corporate). Developing countries like Indonesia at fair greater than the risk of bond maturity developed countries like America.

Therefore, a rational investor will ask for a bond maturity premium karekteristiknya the same, but for longer maturities, say that 10 years from now compared to three years. Who can ensure corporate rating of BBB is still standing 10 years from now? Countries can only dispersed as in the case of the Soviet Union, Yugoslavia, and Czechoslovakia, let alone the corporation. Because of this maturity risk, corporate bond term of more than five years are rarely issued in Indonesia as less desirable.

3. Default Risk

There is only default risk on corporate bonds. In contrast to the ORI and SUN guaranteed by the government as a borrower, corporate bonds are not guaranteed by the government. Investors who buy corporate bonds should be aware that investments can not come back if the bond before maturity, the corporation went bankrupt. Bankrupt corporate risk so that the bonds and interest to be paid for this failure is the risk of default.

Types of Bonds

• Fixed rate bonds have a coupon with a fixed amount that is paid regularly during the life of the bond.

• Floating rate bonds or usually called the Floating rate note (FRN) has calculated the amount of coupon interest refers to a money market index such as LIBOR or Euribor .

• Junk bond or "high-yielding bonds" are bonds that are rated dibahahinvestment rating given by credit rating agencies . Therefore this type of bond has a high enough risk so investors expect a higher yield.

• Bonds without interest , or more commonly known by the term (zero coupon bond) are bonds that do not provide interest payments. These bonds are traded by granting discounts from par value . Bondholders receive the full principal payable at maturity of the bonds.

• Inflation bonds , or better known as the (inflation-linked bond), in which the principal amount of debt on these bonds are indexed on inflation. Interest rates on bonds of this type is lower than fixed rate bonds.However, with the principal amount grows in line with inflation, the payments will also rise. At the period of the 1980s, the government'sEnglish is the first time issued bonds of this type that is named Gilts . in America this type of bond known as Treasury Inflation-Protected Securities (TIPS) and I-bonds .

• Other indexed bonds, are debt-based equity (equity linked notes) and bonds that are indexed on business indicators such as income, added value or on a national index such as gross domestic product .

• Asset-backed securities are bonds whose interest and principal payments owed by underlying cash flows from other assets. Examples of these types of bonds are mortgage-backed securities (mortgage-backed security-MBS), collateralized mortgage obligation (CMOS) andcollateralized debt obligation (CDOs).

• Subordinated bonds are bonds that have lower priority than other bonds issued by the issuer in case of liquidation . In the event of bankruptcyliquidator , kemudaian payment of tax debts, and others. The bondholders preferred that the payment is a bond that has the earliest publication date is called the senior bonds, after the bonds are repaid, the repayment of subordinated bonds before payments are made. Therefore, higher risk, subordinated bonds usually have a lower credit rating than senior bonds.The main examples of subordinated bonds can be found in bonds issued by banks and the asset-backed securities . The latter are often done in the form of " tranches " [2] . The senior tranches get paid first from the subordinated tranches. then there is a hierarchy of creditors. First is to payment of

• Perpetual bonds , bonds do not have a maturity period. Bonds of this type are known in the bond market is "UK Consols" issued by the government of England , or also known as Treasury Annuities or Undated Treasuries. Some of these bonds was first published in 1888 and still trade today. Some bonds of this type also has a maturity period of a very long time such as the West Shore Railroad Company issued bonds with a maturity date in the year 2361 (or 24th century). Sometimes these visits are also lasting bonds based on the cash value of the bonds on the current value of principal near zero.

• Bearer bond is an official certificate with no name holder where anyone who holds these bonds may demand payment of the bonds that held them. Often they are registered by a number to prevent counterfeiting, but can be traded like cash. The bonds are very risky against loss and theft. The bonds are often misused to conceal pajak.ref> Eason, Yla (June 6, 1983). "Final Surge in bearer Bonds'" New York Times. The [3] companies in America to stop the issuance of bearer bonds i9ni since 1982 and is officially banned by the tax authorities in 1983.

• Registered bond is a bond whose ownership or a transfer is registered and recorded by the issuer or by an administrative agency securities . Payments of interest and principal payments will dtransfer direct debt to the bondholders whose names were listed.

• Municipal bonds or in the United States known as the (municipal bonds) are bonds issued by states, territories, cities, local government, or its institutions. Interest paid to bond holders is often exempt from taxation by the state that issued, although municipal bonds issued for certain purposes may be tax exempt.

• Bonds scripless or better known as the Book-entry bond is a bond that does not have a certificate, where the high cost of making the certificate and coupon bonds resulted in the emergence of this type. Bond uses an integrated electronic system that supports the book-entry settlement of securities transactions in the capital market. [4]

• Lottery bonds or also called Lottery bond is a bond issued by a country (usually European countries). The flowers are paid as interest payments on the procedure of the fixed rate bonds but bond issuer will redeem the bonds are randomly such time as the redemption or repayment of bonds of the lucky ones selected will be done at a price higher than the value indicated on the bonds.

• War bonds or War bond is a bond issued by a country to finance the war

Type in the Indonesian bond

In general the types of bonds can be seen from the publishers, namely, corporate bonds and government bonds . Itself consists of government bonds in some species, namely:

1. Recap Bonds , issued for a specific purpose that is within the framework of Bank Recapitalization Program;

2. Government Securities (SUN), issued to finance the budget deficit;

3. Indonesian Retail Bonds (ORI), together with the Suns, issued to finance the budget deficit but with a smaller nominal value that can be purchased in retail;

4. Shariah State Securities or may be also called "Islamic bonds" or "sukuk bonds", together with SUN, published to finance budget deficits but based on Islamic principles.

From the aspect of taxation of the bonds are divided into two kinds, namely:

1. Bonds with a coupon (interest bearing bond)
• Pengasilan Tax imposed on the interest rate to 20% of the gross amount of interest in accordance with the period of ownership (holding period).
• Top diskontonya subject to tax of 20% of the excess of the selling price when the transaction or the par value at maturity over the acquisition price, excluding accrued interest (accrued interest).
2. Bonds without interest (zero coupon bond)
• Only the top diskontonya Income Tax imposed only, that is equal to 20% from excess sales price when the transaction or the par value at maturity of the bonds above the acquisition price.

Bond Valuation Method

Issuance of Bonds

The issuer is very vast, almost every legal entity able to issue bonds, but the rules on procedures governing the issuance of these bonds are very strict.Classification of the bond issuer typically consist of:

• Supranational institutions, such as the European Investment Bank(European Investment Bank) or the Asian Development Bank (Asian Development Bank).
• The government of a country issuing government bonds denominated in their country and government bonds denominated in foreign currencies arecommonly referred to as the international bond sovereign bond). (
• Sub-sovereign, provincial , state or local authority. In the United States known as the Bonds Indonesia known as Government Securities (SUN) [1](municipal bond). In
• Government agencies . Bonds are usually called agency bonds, oragencies.
• Companies issuing corporate bonds .
• Special purpose vehicles are a company established by a special purpose in order to control certain assets that are needed to issue a common bond disebt Asset-Backed Securities .

BUY BONDS STAGE

For bond investing, there are several steps that need to be passed so that the purpose of investment in bonds and provide maximum results in accordance with the plan. Phase can be seen in the diagram in this paper.

Account Opening

The initial phase should be done in the transaction process is to select companies sekuriats bonds with fixed-income division that handles the purchase and sale of bonds. Choose a company with experience, good solid team trader / dealer or research and competitive fees.

By opening an account, you can get information on the development and trading of bonds at any time, so you get a knowledge of bond market movements are accurate and up to date.

Understand Bonds Products

At this stage, investors are encouraged to learn the ins and outs of the necessary information about the bonds, either on their own investment, the potential inherent risks and potential returns. This can be obtained with an independent study it, ask the security company research section, where you open an account or through the internet. By studying the complete secra bonds, investors are expected to know the investment is well, thus simplifying the investment decision making. Learning the instrument, where you want to put their investments, will provide maximum benefit in achieving the desired plan.
Perform Analysis

The analysis was conducted, so that decisions taken in accordance with what is desired, ie the stability of income. Those aspects that are needed such as coupon, maturity date, the value of publishing and ratings. Belankang background and profile of the issuer itself is also a consideration. With complete information, the decision was not expected to cause substantial losses. It is advisable to compare between similar bonds.
Providing Buying Agents

After analysis, you get kind of bonds who want to buy. The next step is to give the mandate to purchase bond trader or broker who has been our choice. Party traders will buy the bonds in accordance with the desired type and price. For example, the buyer will make purchases of bonds ASII (Astra International) in 2002 with a price of 105 or a premium price. Usually the par value or nominal amounts to USD 100.
Prepare Fund

Buying obligasai requires no small amount of funds. Units typically purchase bonds worth Rp 1 billion, making it difficult for individual investors to invest in bonds can participate. Namum, there is also offering a unit valued at Rp 50 million or USD 100 million. After the mandate of the proposed purchase, should the funds already allocated. Not until you pay a penalty, for delay in payment. In addition, the placement of a sudden all-cash funds may be able to disrupt the smooth flow of your financial cash flow and family.

Bond Payment Settlement

Payment fund bond purchases made through transfers to the account of such securities firm. After payment is complete, then you as the buyer have to wait for the process of settlement of such transactions. Bonds that you have purchased will be listed in the accounts listed securities company in KSEI (Indonesian Central Securities Depository). Obliasi alienation of rights would be very easy to do electronically, because now no longer the form of physical bond certificate, but had scriptless (script stage). Accounting administration will be performed by custodian bank securities firms. For this, of course, concerned the bank will charge a certain fee.

Hopefully these brief you are interested in adding information on investing in long-term debt instruments like bonds. Happy investing.