What is Bonds and Stocks

Bond is a term used in the financial world, which is a statement of debt to the bondholder and the issuer promises to pay back the capital and coupon interest in the future on the due date of payment. Other provisions may also be included in the bond such as bondholders, restrictions on legal action taken by the issuer. Bonds are generally issued for a specified period of 10 years.

Short bonds payable but in the form of security. The “issuer” is the bond debtor or debtor, while the bond “holder” is the lender or creditor and the bond “coupon” is the interest on the loan that must be paid by the debtor to the creditor. With the issuance of these bonds it will be possible for the issuer to obtain long-term investment financing with funds from outside the company.

In some countries, the terms “bond” and “debt” are used depending on the duration. Market participants usually use the term bond for the issuance of debt securities in large quantities that are widely offered to the public and the term “debt” is used for the issuance of debt securities on a small scale which is usually offered to small investors. There is no clear limit on the use of this term. There is also a known term “treasury” used for fixed income security with maturities of 3 years or less.

Bonds have the highest risk compared to “debt” which has a medium risk, and “treasury” which has the lowest risk which is seen from the “duration” side of bonds having a shorter duration, the lower the risk.

Bonds and shares are both financial securities instruments, but the difference is that shareholders are part owners of the company that issues shares, whereas bondholders are merely lenders or creditors to the issuer. Bonds also usually have a set term that comes after the term the bond can be redeemed while stocks are forever (except in bonds issued by the British government called gilts which have no maturity).

Understanding Bonds According to Experts

According to Adler, Desmon, Wilson

Bonds are one source of funding ( financing ) for the government and companies, which can be obtained from the capital market. In simple terms, bonds are securities issued by the issuer ( issuer ) to investors ( bondholders ), where the issuer will provide a return ( return ) in the form of coupons that are paid regularly and the principal value ( principal ) when the bond matures.

According to Gitman

Bonds are long-term debt instruments that indicate that a company has borrowed a certain amount of money and promised to repay it in the future on predetermined terms. The pre-determined conditions are the maturity date, coupon interest rate, and interest payment period.

According to Bodie, Kane, and Marcus

Bonds are often referred to as fixed-income securities because bonds offer a steady stream of cash income or cash income streams with a predetermined formula. Bonds are relatively easy to understand because the amount of payment is predetermined and the risk involved can be relatively small as long as the issuer of the bond can be trusted in its ability to pay its debts.

Types of Bonds

Before the bond sale and purchase transaction occurs, there is a bond indenture contract between the buyer and the seller of the bonds. And the types of bonds are determined by the contract agreement, the types of bonds include:

1. Based on the bond issuer (issuer )
2. Based on the interest payment system
3. Based on the interest rate
4. Based on the guarantee
5. In terms of place of publication
6. In terms of ratings
7. Based on-call feature
8. In terms of conversion
9. From the point of view of the calculation of returns

Bond Benefits and Bond Risks

Benefits of Bonds

1. Flower

paid regularly until maturity and is determined as a percentage of the face value.

Example: Bonds with a coupon of 10%, meaning that the party issuing the bonds will pay Rp. 10 for every Rp. 100 of the nominal value each year. Usually, interest is paid every 3 or 6 months.

2. Capital Gain

Prior to maturity, bonds are usually traded on the secondary market, so investors have the opportunity to obtain capital gains. Capital gains can also be obtained if investors buy bonds at a discount, ie at a value lower than their nominal value, then at maturity they will receive payments equal to the nominal price.

3. First Claim Rights

If the issuer goes bankrupt or is liquidated, the bondholders as creditors have the first claim on the company’s assets.

4. Convertible Rights on Convertible Bonds

If you have convertible bonds, the investor can convert the bonds into shares at a predetermined price, and then be entitled to benefit from the shares.

Bond Risk

In investing in bonds, there are risks that can arise, including:

1. Credit Risk (Default Risk)

Credit risk is the risk that the issuer cannot pay the interest or principal of the debt. This risk measurement tool that is commonly used is the rating of bond issuers. In general, the rating is defined as an opinion on the company’s ability to meet its financial obligations by taking into account the relevant risk factors.

2. Market Risk

The risk of instrument price volatility and reinvestment risk from coupons received due to movement in interest rates. The measuring tools that are generally used to see price sensitivity to interest rate movements are duration and convexity.

3. Liquidity Risk

Liquidity risk is the risk that instrument holders have difficulty selling bonds at fair prices when forced to sell them.

4. Foreign Exchange Risk

Forex risk is the risk that arises due to the movement of currency exchange rates when investing in a bond that has a different currency.

5. Political (Country) Risk

Political risk can arise from government actions, such as regulatory changes, scheduling, and debt restructuring.

Bond Character

In general, bonds can be divided based on the following four characteristics (Agus Salim; 2002):

1. Intrinsic Features ( Intrinsic Features )

Coupons, maturity, and type of bond ownership are intrinsically important features of a bond. The coupon of a bond indicates the periodic income that the investor will earn over the life of the bond or the period of its ownership. Coupons are also known as interest income.

Maturity is a specific date when the bond’s life expires. On that date the issuer is required to pay the principal and the last coupon of the bonds. The principal value of a bond is the true value of a bond. bond ownership is based on who holds the bonds and the second is a scriptless bond ( registered bonds ) which means that bond ownership is based on who is registered as the owner of the central custodian.

2. Emission Type

In contrast to stocks, a company can have different types of outstanding bonds at the same time. Types of bonds can be distinguished based on the seniority of the claims of the bonds, starting from the safest, namely senior bonds ( secured bonds ), paripassu bonds ( unsecured / debenture bonds ), to subordinate bonds ( junior bonds ) which have claims rights to the latest income and principal payments.

3. Indenture Provision

An indenture is a contract between an issuer and an investor related to the legal aspects of the bond. The trustee, which is usually a bank, acts on behalf of the bondholder to ensure that all of the indenture’s provisions are met by the issuer, including timely payments of interest and principal.

4. Features Affecting Maturity

Investors should be aware of the features possessed by bonds that can result in bonds maturing prematurely, namely call options which give the bond issuer the right to pay off the bonds at a time before maturity. In addition, there is also a put option that gives bondholders the right to request early repayment of bonds before maturity and the Sinking Fund which specifically makes bonds pay off in stages, systematically, and periodically according to a predetermined time.

Examples of Bonds

Issuers are given the right to buy back bonds at a certain price, and of course with a certain period of time in accordance with the given time bonds or often known as callable bonds. In subsequent exchanges the Bond Holder has the right to convert the bonds into a number of shares owned by the issuer.

In an effort to have several bonds are usually offered, among other things the price of bonds is greater than the existing nominal or commonly known as Premium Bonds. In addition, in the offering, bonds are also offered at a price equal to the face value, or commonly known as Par. The offering price is also actually less than a par bond, often called a Discount Bond.

Understanding Shares

In the world of business or economics, it is very familiar when talking about stocks. In the company will not be separated from the words stock. Therefore I am interested in searching from several sources regarding stocks. So here I found the notion of stocks and a little about the stock itself.

Shares are a sign of equity participation in a limited liability company as it is known that the purpose of the investor is to buy shares to earn income from these shares. The investors are categorized as investors and speculators.

Investors here are people who buy shares to own a company in the hope of getting dividends and capital gains in the long term, while speculators are people who buy shares for immediate resale if the exchange rate situation is considered to be the most profitable as it is known that stocks provide two kinds of income, namely dividends. and capital gains.

Understanding Shares According to Experts

1. According to Gitman:

Shares are the purest and simplest form of corporate ownership (Gitman 2000, 7)

2. According to Bernstein:

Stock is a piece of paper that states ownership of a part of the company. (Bernstein: 1995, 197)

3. According to Mishkin:

Stock is a security that has a claim on the income and assets of a company. Security itself can be interpreted as a claim on the future income of a borrower sold by the borrower to the lender, often also called a financial instrument. (Mishkin:2001, 4).

4. According to Darmadji and Fakhruddin, 2001: 5).

Shares are a sign of participation or ownership of a person or entity in a company or limited liability company. The form of a share is a piece of paper that explains that the owner of the paper is the owner of the company that issued the securities. The portion of ownership is determined by how much investment is invested in the company