investment poll

Debt securities or the more commonly known as bonds is one of the investment instruments that are also traded in secondary markets Indonesia Stock Exchange (BEI).

Although no such prestige product stocks, but bonds have an interest in the product and its own place in world capital markets.

In fact, if I may say, still some who really understand the mechanism of bond transactions in products trading floor. And in fact, the product of bonds is one investment that can provide big benefits with minimum risk level.

In a column this portfolio, detikFinance tried to introduce a simple description of this product.

Bonds is one type of fixed income securities Uncategorized. Bonds are debt instruments that contain letters of agreement or contract willingness borrower (issuer / issuer) to make regular payments to the lender (investor) in a certain period.

Of course, the entire loan principal will be returned at the end of the contract period. Well, the interesting thing is, these bonds can be traded and transferred during the period of repayment period.

Characteristics of bonds divided into 4 categories, namely the issuer, priority, coupon rate of interest and redemption options.

In terms of publishers, bonds are classified into two types ie Government Bonds and Corporate Bonds. Both have a different characteristic.

Government bonds typically have a coupon rate lower interest rate which would provide a yield to maturity (YTM) is also lower. However, the level of risk can be said almost nothing. Because these bonds fully guaranteed by the government, so unlikely event of default.

Corporate bonds usually provide a coupon rate higher rates which would provide a higher YTM too. But the higher risk level, because private companies always have the possibility of default. Therefore, corporate bonds are usually accompanied by features that attract commonly known by the term Sweetener (sweetener).

In terms of priorities, the bonds are divided into two types of senior bonds and bonds junior (subordinated bonds / subdebt). At no government bonds this classification.

The difference between these two types of bonds is the priority when there is a default state (default). If a corporation’s default, the lender’s senior bonds will be prioritized for payment.

Meanwhile, junior bonds get second place after the payment to holders of senior bonds

done. Therefore, the coupon interest rate offered at the junior bonds are usually higher than the senior bonds, because it is assumed a greater level of risk.

From the side of the coupon interest rate, in general there are 3 types of coupons that apply in Indonesia, namely fixed interest coupon, coupon rates and zero coupon floater.

Fixed interest coupon rate of return to (return) that remain since the beginning of bonds issued until maturity. So that the interest calculation must be paid and the bond issuer YTM calculation for bond investors became easier.

Coupon interest rate of return floater gave varying according to the reference interest rate. Typically, the reference interest rate on the SBI (Bank Indonesia Certificate).

Zero coupon bonds are not giving the installments of interest coupons, but rather the beginning of discounting at the bond offering. For example, a company issue bonds worth Rp 1 billion, the price investors must pay, say, Rp 900 million.

Later on maturity, the issuer will pay the full amount of Rp 1 billion. So investors will receive payment of interest coupons in advance.

In terms of redemption options, generally consist of call options, put options and conversion options. Call option (call option) is a right which the issuer has to make a purchase back (sort of buy-back) at a certain period prior to maturity bonds.

Conversely, a put option (put option) is a right held by bond investors to sell back bonds to the issuer owned. However, the put option is rarely granted, because it is not profitable for the issuer.

While the conversion option is a repayment offer to exchange bonds with a value of debt obligations into shares. With this option, investors who had become the lender, after the due date will be turned into owners of capital in the company that issued convertible bonds.

According Yunianto Handy, an analyst with bonds of PT Mandiri Securities, each of the above classifications have different levels of risk are different. Therefore, trading characteristics of each type of bonds earlier will vary also.

“The price of bonds formed in the secondary market will follow the level of risk and its YTM expectations of each. For, as the closer when due, then the rate of return and risk of each bond product will vary. This is affecting price, “he said in Independent Club last week.

In the bond transactions in the secondary market, the price calculation used completely different from the calculation of stock trading. The price used was using percentage units, not the denomination rupiah.

At the time bonds issued, the bond price will be at the level of 100% or commonly known by the term Par price. YTM level even when issued the coupon rate equivalent to the interest rate offered.

As an illustration, a company issue bonds worth Rp 1 billion 5-year term with a coupon rate 7.5% per year and payable every 6 months.

At the time of publication, the price of these bonds is the price of par with the 7.5% YTM. That means, if the holder decides not to sell bonds these bonds to maturity, the bondholders will get funding for 100% (USD 1 billion) at maturity plus 7.5% annual interest rate multiplied by 5 (USD 375 million) or total USD 1.375 billion.

However, if an investor bought these bonds in the secondary market in the second year, that means the level of return that would be obtained were different. Because he did not get the coupon payments of interest before he bought the bonds.

Consequently, the price of bonds in the secondary market was unlikely he bought at the price of Par.

Simply say the price of bonds in the second year will be below par prices, call it 98%. Therefore, investors will catch the difference in the level of return that is not obtained by placing a buy position at a price below the par price.

But what happens in the market is not that simple. According to Handy, in addition to these factors, there are other factors that make investors offering different in the secondary market.

“The deciding factor is the price of bonds is the factor most interest rates,” he explained.

Continuing this illustration, if when he bought bonds earlier in the second year, where interest rates declined to a level even 6%, then the bond price movements in the secondary market will depend on expectations of interest rates trend.

Illustration like this, if investors are speculating the future trend of interest rates will increasingly come down, call it to the level of 5%, then he will put bids in to buy at prices above par prices.

“In this way he will have a YTM growing ahead of him in line with the trend decline in interest rates,” said Handy.

Conversely, if investors are projecting into the future interest rates will rise, call it to the level of 8%, then the consequences would yield projected to decline acceptance.

“Therefore, to continue to yield large, he will put bid price below par,” said Handy.

Handy explained, the following simple formula:

* If the SBI is projected to decline, YTM will decrease, then prices will tend to rise.
* If BI is projected to increase, YTM would go up, then prices will tend to fall.

Therefore, Handy continued to play bonds in the secondary market, investors must consider the calculation of the projected trend of interest rates. Therefore, the trend rate greatly affect the movement of bond prices in the secondary market.

“Factor to consider is future inflation trends. Because the trend of inflation running seiringan the trend interest rates (SBI). If inflation rises, the SBI will go up also, conversely, if inflation falls, the SBI will come down too,” he said .

Well, talking about the macro economic conditions of Indonesia to the front, says the latest projection into the second semester, 2010 will be the global economic recovery. This recovery will certainly include Indonesia in it.

“Economic recovery is usually accompanied by rising inflation which will surely lead to an increase in interest rates,” said Handy.

With simple logic, can be assumed, the future will be higher interest rates which will make products YTM of bonds also increases.

So consequently, will decrease the prices of bonds in the secondary market before the second semester-2010.