Definition and Types of Bond (Bond)

In the Act No. 8 of 1995 concerning the Capital Market stated that bonds are one part of the securities. In the Law it is said that Securities are securities that can be in the form of debt securities, commercial securities, shares, bonds, proof of debt, participation units in collective investment contracts, futures contracts for securities, and any derivatives of securities. So here it is clear that bonds are securities, because bonds are one part of the effect, trading and buying and selling bonds are not arbitrary, but must be through an institution, in this case the securities trading institution is INX.

I am sure that you have often heard the word bond, of course because the term bond is very commonly used in the business and financial world. But do you know what the bonds really mean? And what are the types of bonds currently available? Okay, for those of you who do not know what is meant by bonds, and also do not know the types, in this post I will try to explain the meaning of bonds and types of bonds, along with the explanation:

Understanding of Bonds

Bonds

Basically what is meant by bonds is a letter or certificate of recognition of debt issued by the borrower for a number of funds (debt) received from investors (bondholders) as the party who gave the loan. The point is that bonds are long-term debt securities (generally more than ten years). Later the party receiving the loan is obliged to pay a number of coupons or interest along with the principal of the loan to the bondholders until the maturity of the debt, from the interest paid, the investor gains.

The market value of a bond is strongly influenced by interest rates, if interest rates increase usually the market value (market price) of bonds will decrease, this is due to the lack of investors because if interest rates increase investors prefer to invest their capital in the bank. Conversely, if the interest rate decreases, the bond market price will increase, because investors will choose bonds rather than investing their capital in the bank.

Indeed, this bond is basically a debt, but what is meant by debt here is not individual debt, if the investor can be an individual, but the party that borrows / issues bonds is not an individual but an entity, both a private company, government and regional government. The purpose of the borrower issuing bonds is to get funds, these funds can later be used for company expansion or to cover other needs.

Actually to get a number of funds / capital, the company is not only through bonds, but also through the issuance of shares. But in this case the company has its own reasons for choosing to issue bonds rather than issuing shares, a common reason why companies prefer to issue bonds rather than stocks is because the company does not want to intervene outside of the larger companies. As we know, if someone buys the shares of a particular company then that person will become part of the owner of the company so that they have the right to participate in determining the direction of the company. This is different from the bond holders, bondholders are not the owners of the company, so this does not give bondholders the right to participate in determining the direction of the company.

Types of Bonds

Types of Bond investment

There are many benchmarks that can be used to distinguish types of bonds, including bonds based on the issuer side, interest payment system, exchange rights, terms of collateral, nominal value, and bonds based on the calculation of yields.

1. Types of bonds based on the issuer side

  • Corporate Bonds, bonds issued by certain companies, this company can be in the form of a private company or a state company (BANM).
  • Government Bond, bonds issued by the central government.
  • Municipal Bond, a bond issued by a regional government that will be used to finance public projects.

 

2. Type of bond based on the guarantee

  • Secured Bonds, bonds that are guaranteed by using certain assets owned by the issuer, or can also be guaranteed by using a third party. These bonds are divided into three, namely guaranteed bonds (bonds guaranteed by third parties), mortgage bonds (bonds that are secured with mortgages or fixed assets), and collateral trust bonds (bonds that are guaranteed by using securities owned by the issuer).
  • Unsecured Bond, a bond that is not guaranteed by using certain assets owned by the issuer.

 

3. Types of bonds based on exchange rights

  • Convertible Bonds, bonds that can be exchanged with shares of the issuing company. This means that the bondholders have the right if at any time they want to exchange the bonds they hold with the company’s shares.
  • Exchangeable Bond, a bond that gives the bond holder the right to exchange company shares into a number of shares of the issuer’s affiliated company.
  • Callable Bond, a bond that gives the issuer the right to repurchase bonds at a certain price throughout the life of the bond.
  • Putable Bond, a bond that gives investors the right that requires the issuer to repurchase bonds at a certain price throughout the life of the bond.

 

4. Types of bonds based on the interest payment system

  • Zero Coupon Bond, the payment system of these bonds is done by paying at the same time when the maturity (loan principal and interest) is not periodic.
  • Coupon Bond, bonds with coupons that can be cashed periodically in accordance with the provisions of the issuer.
  • Fixed Coupon Bond, a bond with a coupon rate that has been set before the offering period on the primary market and will be paid periodically.
  • Floating Coupon Bond, a bond with a rate of interest coupons determined before that period, based on a certain benchmark.

 

5. Types of bonds based on nominal value

  • Conventional Bonds, bonds with a large nominal value unit, generally Rp. 1 billion per lot.
  • Retail Bond, the opposite of conventional bonds, namely bonds with small nominal value units.

 

6. Types of bonds based on calculation of yields

  • Conventional Bonds, bonds that work using the interest system.
  • Sharia Bond, bonds that work and calculate using the Islamic system / Islamic Shari’a, namely the profit sharing system.

Shareholders VS Bond Holders

Shareholders VS Bond Holders

Between these shareholders and bondholders, conflicts can occur, this conflict occurs because of the problem of dividend payments. Shareholders argue that they are the owners of the company so managers should give them the highest benefit / welfare by paying high dividends. While bondholders tend to prohibit management from paying high dividends to shareholders, this is done by bondholders because if managers pay high dividends to shareholders, the company’s assets / assets used as collateral for bonds will decrease, so if in the future the company unable to pay off debts, go bankrupt, or be liquidated, the value of collateral given to bondholders will be small.

This will certainly harm the bond holders so that they will prohibit management from paying high dividends to shareholders.