Bonds Definitions, Types, and How Do They Work? Even though the name is not as famous as deposits or even stocks, it does not mean that bonds as an investment product are relatively low in interest.
Just so you know, as an investment medium, there are several types of debt securities (bonds) that you can also use to multiply your assets.
So, so that you understand better and don’t choose the wrong type of product, let’s check the reviews that have been summarized by BBonlinemoney below.
Bond Definition and Meaning
Bonds are term bonds issued by the government or companies that can be traded.
Bonds contain an agreement from the party that issues the securities in the form of interest/coupon to the party who buys the bonds.
The contents of this agreement include the loan amount, interest, up to the due date for debt repayment.
A person/business entity who buys state or company bonds is considered a receivable which the state or company owes to that person with a predetermined nominal.
Generally, bonds have a tenor of 1 to 10 years. Through the issuance of bonds, the government can raise funds for infrastructure development and cover the state budget deficit.
Meanwhile, from the business point of view, bonds are usually used to support company expansion, such as to finance capital expenditures or company operational costs.
Similar to other investment products, bonds can be purchased by anyone. Even some bonds allow foreign investors to own them.
To buy bonds, you can get them from the issuer during their initial trade or through the secondary market. Through the primary market, investors who are considered to have the potential to buy will be offered Initial Public Offering or IPO bonds.
Meanwhile, investors who want to buy bonds through the secondary market can obtain them on the stock exchange or a designated distributor.
Characteristics of Bonds
Bonds have a face value that must be paid by the bond issuer at maturity. The issuer must include the number of funds in the bond sheet.
The provisions for the number of funds are usually based on cash flow, the needs of the issuer, and business performance.
Most lenders actually prefer short-term bond investments because the risks are much less.
But there are also bonds with maturities of up to 30 years.
The Current Yield is the profit you will receive as a bondholder from the coupon (interest) for one year against the bond price.
To calculate the current yield, you can do a calculation based on the annual interest on the bond price, then later the current yield calculation will be in the form of a percentage.
Bond ratings generally consist of two or three letters accompanied by symbols or numbers. This ranking is determined by the rating agency.
The higher the rating of the bond, the lower the interest. Vice versa, the lower the bond rating, the higher the interest and risk offered.
The advantages of bonds as an investment
Being an investment instrument, bonds have a number of advantages for holders who place their money in this instrument. Here are the advantages:
- Users can use bonds as collateral when borrowing funds, for example, government bonds.
- Get benefits from fixed coupons and floating/variable coupons.
- Users will benefit from coupons that are higher than deposit interest.
- Can be traded on the secondary market or transactions outside the exchange.
Disadvantages of Bonds as Investment
Although it has a number of advantages, it does not mean that bonds do not have disadvantages. As with other investment instruments, the disadvantages of bonds are:
- Bondholders can experience capital loss if they sell bonds at the wrong time.
- Vulnerable to an unstable economy. These changes affect the number of interest rates. If interest rates rise, prices will decline, and vice versa.
- Has the risk of default which results in loss of profits. Not only that, but bondholders will also not get the entire principal debt.
Types of Bonds
There are several types of bonds that are divided based on the issuer. If you are interested, here are three types of bonds that you need to know first. Among others are:
Corporate bonds are types of bonds issued by companies.
This type of bond is issued by the government.
Not only issued by the government but bonds can also be issued by local governments known as municipal bonds.
So, do you understand what bonds are? One thing you need to consider before using a bond service is the duration of this type of investment.
Considering that bonds are long-term investments, you cannot withdraw funds at will. Because these funds can only be withdrawn at least half of what you have, and even then within a certain time.
So, make sure first that the funds you will use to play bonds are not funds for your emergency needs.