Find out the Types of Bonds and How They Work
19 Jul 2022

Find out the Types of Bonds and How They Work

When you are investing, surely you as an investor want a profitable investment product. One of the choices of investment products in Indonesia is Bonds. Please note that there are several types of Bonds, but make sure you know the meaning of Bonds first.

Bonds are one of the most attractive investment product options, no wonder more and more investors are turning to this type of investment. Bonds are defined as debt securities issued by Bond issuers to Bond holders. Also accompanied by an agreement and interest coupon with a predetermined time or maturity.

 

Types of Bonds and How They Work

The Bonds will include the maturity date for payment of debt and the applicable coupon or interest. This is the obligation of the Bond issuers to the Bond holders which is usually valid for 1 to 10 years. Bonds are issued because of the need for funds collected from the public as a source of funding.

So it's no wonder why Bonds are also widely used for fresh funds for entrepreneurs. After knowing what Bonds are, here are some types of Bonds and also how they work.

1. Types of Bonds

Bonds themselves have special characteristics, namely having a claim on the company's assets and revenues when the Bonds issuer company go bankrupt. Bond holders can get the first right to sell assets. The Bonds also have a nominal value that has been listed in the Bonds sheet. 

In addition, of course, the characteristics of Bonds are having an indenture or called a contract between the issuer of the Bond and the representative of the Bond holder. The contract contains rights and obligations between the Bond issuer and the holder. It also includes a nominal value, coupon, maturity period and others. Here are some types of bonds you need to know.

●  Government Bonds

Government Bonds or SUN are issued by the Government of the Republic of Indonesia. Government Bonds are Fixed Coupon Bonds (FR-Fixed Rate), Variable Coupon Bonds (VR-Variable Rate) and sharia-principle Bonds or State Sukuk.

Government Bonds are considered safer because the government is authorized to charge taxes and print money.

●  Corporate Bonds

Then there is the Corporate Bonds. As the name implies, this type of Bond is issued by a corporation or company. The categories of companies in Indonesia that issue these bonds are BUMN or other corporations.

Corporate Bonds are the same as Government Bonds which are divided into Bonds with fixed coupons, Bonds with variable coupons and finally Bonds with sharia principles.

2. How Bonds Work

After knowing the types of Bonds, now can discuss on how Bonds work. Surely many are curious about how Bonds work, which will be explained as follows:

●    Issuance of Debt Instruments

In bonds, it is necessary to issue debt securities. Debt securities are issued when a company or other entity is in need of funds for financing. Usually the financing is intended for new projects or ongoing projects or also for other debt financing.

 

In this case the company or other entity acts as the issuer of Bonds. The issuance of debt securities has several coverage requirements such as loan terms, interest payments and also maturity dates. This maturity date is the time at which the borrowed funds must be repaid.

●    Coupon Payment

As previously mentioned, in Bonds there are interests or coupons. The way this coupon payment works is done periodically directly to the Bond holders because they have lent funds to the issuer. There is also the term interest rate to determine payments called the coupon rate.

●   Initial Price And Actual Market Price

When investing in Bonds, there is an initial price and actual price. The initial price itself is determined by the face value during the initial offering period. Meanwhile, the actual market price depends on several factors. For example, the credit quality of the issuer to the length of time and also the maturity period. There are also influencing factors such as the coupon rate compared to the current interest rate environment.

●   Bond Sale

Several types of Bonds are sold by the initial Bond holders to other investors after the Bonds are issued. So you as a Bond investor are not required to hold bonds until maturity. Because in general, Bonds can be bought again by borrowers when interest rates decline.

When the borrower's credit condition improves, usually Bonds are reissued at a lower cost.

 

Safe Government Bond Investment Only in DBS Treasures

After knowing what Bonds are, types of Bonds, and also how they work, the next thing to do is to choose the right investment partner. For that, you can rely on DBS Treasures priority banking as an investment partner with various advantages. The following are some of the advantages of investing in Government Bonds with DBS Treasures to note.

 

  • Safe investment, DBS Treasures as a priority banking is a safe investment partner. Bonds are issued directly by the government. So the investment is guaranteed by Law. You don't have to worry about fake investments that are currently rife in the news. DBS Treasures is a legal place to invest.
  • Wealth of options, Bond investment in DBS Treasures has maturity period options that can be adjusted according to preferences. In addition, there are also many product choices in currencies other than rupiah, namely USD and EUR.
  • Regular coupons, Bond investment through DBS Treasures allows you to gain coupons or interest on a regular basis.
  • Competitive coupons, especially supported by competitive coupon rates above the average Fixed Deposit interest rate. You can gain this regular coupon with periodic payments during the investment period. 
  • No additional fees, no need to worry about the fees. Through DBS Treasures, the only cost that needs to be paid is the difference between the selling price and the purchase price. So you no longer need to think about other costs and can focus on investing alone.
  • Potential capital gain, Bond investment through DBS Treasures is very flexible because several types of products can be sold at any time even before maturity. So you can gain the potential profit from rising Bond prices. 
  • 24/7 transactions, at DBS Treasures you can invest online for 24 hours, anytime and anywhere by relying on the application on your smartphone. You can also find a variety of Bond products that are traded through the digibank by DBS Application. Moreover, it is also supported by an easy investment method and can be done by anyone.

That concludes the explanation about Bonds, types of Bonds, and how investing with Bonds instrument works. For those who want to invest with DBS Treasures, you must first create a Single Investor Identity or SID via the application provided by DBS Treasures. After that, you can choose between Primary Market Bonds or Secondary Market Bonds and specify the desired investment denomination, between IDR or USD.

For the selection of Bond products, choose based on the risk profile, desired coupon or yield, and maturity. You can also contact DBS Treasures for further discussion regarding Bond investment by joining as a priority banking Customer. Gain a wealth management strategy tailored to your aspirations make the right investment decisions confidently.

PT Bank DBS Indonesia is registered and supervised by Financial Services Authority (OJK), and also a participant of Indonesia Deposit Insurance Corporation (LPS) guarantee program