01 Mar 2022 | Edukatips

Things to Know about Bonds and the Benefits of Investing in Them

*Update : 1 Mar 2024

A bond is an auspicious investment instrument, with relatively low risk. Unfortunately, not many people are interested in this type of investment.

To start investing, you can jump right into bond investments, or through fixed-income funds. However, before investing, you should first know the things about bonds.

What is a Bond?

A bond is a debt security issued by a bond issuer with a maturity of more than one year. It offers certain yields to make it an attractive investment. Companies that issued bonds are usually seeking funds to finance business operations.

In other words, bonds are debt acknowledgement letters of a company or government to investors. It confirms that the government or company owes a certain amount of money to the public within a certain period of time.

Generally, the tenor of bonds ranges from 1–50 years. In addition, companies that issue bonds are entitled to repayment of the agreed-upon principal plus additional interest. In bonds, interest is usually referred to as the coupon.

What are the differences between stocks and bonds?

Many of us may not be aware of the difference between stocks and bonds. Both investment instruments are making inroads into society. They also aim to raise money to further the business interests of a company or an institution.

However, stocks and bonds have differences. Shares represents ownership of a company. Meanwhile, bonds are debt securities issued by borrowers. If the shareholder has voting rights over the company, the bondholder is the lender.

In addition, the profits obtained by shareholders are usually volatile or uncertain. Meanwhile, the bond yields have been predetermined and agreed-upon at the beginning. The time frames of stocks and bonds are also very different. The term of the shares is determined from the share ownership. Furthermore, the time limit of stock holding is also determined from whether or not the company is still running. Unlike shares, the term of bonds has been determined at the beginning of the purchase.

So, what are the differences between stocks and bonds as an investment instrument? Look at the table below:

Differences	Bonds	Stocks
Issuer	Company or government	Public Company
Terms	Set when the bond is issued. Suitable for short to long-term investments and can be adjusted to bond types.	There is no specific time limit, as long as the company still exists. Suitable for long-term investments.
Returns	In the form of coupons and delivered at specified period of time and allows for capital gains or the difference between the purchase and selling prices.	Obtained from the difference between the purchase and selling prices when selling the shares you own.
Price Fluctuation (Volatility)	Lower (affected by interest rates and inflation)	Higher (strongly affected by various factors such as economic, social, etc.)

Advantages of Bonds

This investment instrument offers a number of advantages to investors. Here are some of the advantages of bonds:

Bonds offer coupons or higher interest rate than that of deposits. In addition, the coupon is delivered regularly during the bond tenor.
Bondholders can sell their debts to others. If you sell bonds higher than the purchase price, you earn what is commonly called as capital gain.
Especially for government bonds, you can use it as collateral when applying for a loan to a bank.
The security of bonds issued by the government is guaranteed by law. The borrowers must repay the principal plus the coupons.

Risks of Bonds

Despite the advantages, bonds also contain risks. Here are some disadvantages of bonds:

Bonds are subject to liquidity risk. It means that you might not be able to sell your bonds quickly at a secondary market due to a thin market with few buyers and sellers for the bond.
Bonds are subject to maturity risk. This risk is related to the term of the bond. The longer the tenor, the higher the risk. That’s why bond issuers offer higher interest coupons for long-term bonds.
Bonds are subject to default risk. This risk usually occurs in corporate bonds. There is the possibility that the company will go bankrupt and will be unable to pay its obligation.

Types of Bonds

Following are the types of bonds at the capital market:

Government Bonds, namely debt securities issued by the government.
Corporate Bonds, namely debt securities issued by Stated-Owned Enterprises (BUMN) or certain private companies.

There are several types of bonds issued by the government, including:

Types of State Securities (SBN)	Sharia Principles	Name of Bonds	Remarks	Minimum Investment
Retail SBN	Conventional	Retail Government Bonds (ORI)	Traded at the Primary Market (investors directly buy from bond issuers) & Secondary Market (investors can buy and sell to/from other investors)	IDR1 Million
	Conventional	Retail Savings Bond (SBR)	Can only be purchased at Primary Market
	Sharia-Compliant	Retail Government Sukuk (SR)	Traded at Primary & Secondary Market
	Sharia-Compliant	Savings Sukuk (ST)	Can only be purchased at Primary Market
Non-Retail SBN	Conventional	Fixed Rate (FR)	Can only be traded at Secondary Market	IDR100 Million
	Conventional	USD Government Bonds (INDON)		USD30 Thousand
	Syariah	Project-Based Sukuk (PBS)		IDR100 Million
	Syariah	USD Government Bonds (INDOIS)		USD30 Thousand

That sums up the top things you need to know about bonds. Are you now ready to add bonds you’re your portfolio? Do not forget to identify your investment risk profile. You can start investing through Welma feature in myBCA application which is easy to buy and sell various types and series of bonds at competitive prices. Let’s start now!