Monday, 18 February 2013


Over the year functioning of the stockmarket as instrument of investment had been highly potential. Meanwhile direct investment in the property sector could have risen higher, but investors were warned about the alarming high price. To illustrate, in a big city like Jakarta, an apartment priced at below Rp 800 million (of 3-star category) and Rusunami flat could serve as long term alternative investment.
What, then, about the mid-term investment? It was noteworthy that in case of political tension in the Middle East, investment in precious metals would still be the prima donna. Beside gold with controlled inflation and low bank interest-bond would be sought after by financial institutions and companies. In this case SUN, ORI, Sukuk and Ritel could be considered as option beside the RDPT Dana Raksa Insurance.

One thing to be cautious about was that today there were various insurance types (Unitlink) which would be due in 2012 (10 year since release in 2012). If the investment turned out to be unsatisfactory (after being deducted by tax etc) it might disappoint many investors.

The only thing was, two of the most popular instruments of the stockmarket were shares and bonds. However, the two shares had different characteristics. Shares promised potentials of high profit but full of risk. Whilst in case of bonds in spite of lower profit was safer that shares.

Price of shares were also not restless and more related to changes in interest bank rates. In addition to that holder of bonds would surely receive interest coupon according to the size of written in the prospectus.

In this discussion analysis would be particularly only on bonds. Bond was only promissory notes of medium-long period which was endorsable containing promise of the issuer to pay remunerance in the form of interest over a certainly period and to repay capital debt in a given time to buyer of the bond.

Bonds were of various types. Firstly, from the issuer’s view point. There were corporate bonds, i.e. bonds issued by companies whether in the form of State Owned Companies (BUMN) or private institutions. And then there was Government Bonds, i.e. bonds issued by the Central Government. Furthermore there was the Municipal Bond, i.e. bonds issued by the provincial Government to finance public utility projects.

Secondly, in terms of interest payment, there was the so called Zero Coupon Bonds, i.e. bonds with coupon which could be liquidated periodically. However, capital debt could be paid at the same time on the due date. And then there was the Coupon Bonds which could be liquidated periodically according to the terms and conditions of the issuer.

Furthermore there was the Fixed Coupon Bonds, i.e. bonds with interest which was fixed before time of offering in the primary market and would be paid periodically. Next there was this Floating Coupon Bonds, i.e. bonds with interest rate stipulated before that time frame, based on certain benchmark like Average Time Deposit (STD) i.e. the average interest rate of fixed deposit of the Government and private banks.

Third, in terms of exchange right, there were the Convertible Bonds, i.e. bonds which gave right to the bond holder to convert the bond into a number of shares belonging to the issuer. There was also the Ex-changeable Bonds. Bonds that gave right to the bond holder to exchange company’s bonds into a number of company shares belonging to the issuer’s affiliated company.

And then there was the Callable Bonds which gave right to existents to buy bank bonds at certain price as long as they were valid furthermore there was the Potable Bonds, i.e. bonds that gave right to investors which obliged investors to buy back bonds within the life span of bonds.

Fourthly, in terms or guarantee or collaterals, there was the Secured Bonds, i.e. bonds which were guaranteed by certain asset of the issuer or by guaranteed of the third party. Included in this category were Guaranteed Bonds (bonds with payment of interest and capital debt guaranteed by third party), Mortgage Bonds (bonds with interest payment and capital debt payment guaranteed by hypothetic guarantee on property or fixed assets), and Collateral Trust Bonds (bonds guaranteed by security owned by issuer in their portfolio for example shares of the subsidiary companies owned). There was also the Unsecured Bonds, i.e. bonds not being protected by any certain wealth but guaranteed by issuer’s wealth in general.

Fifthly, in term of nominal value there was the Conventional Bonds, i.e. bonds commonly traded in one single nominal value, for example Rp 1 billion per lot. And then there was the retail bonds i.e. bonds being traded in small single nominal values, Corporate or government bonds.

Sixthly in term of calculation of return, there was the Conventional Bonds or bonds being included by way of interest coupon and there was the Syariah Bond i.e. bonds based on yield return by way of profit sharing.

In this context there were two types of Syariah bonds, i.e. Syariah Mudharabah (a Syariah bond based on profit sharing contract in such a way that the income obtained by the investor on that bond was obtained after knowing emitents income); and Syariah Ijarah Bond was a Syariah Bond based on contract rent so the Ijarah fee coupon was fixed and could be known/calculated since issuance of fund at the very start.

So bond as monetary instrument offered two types of benefits. Firstly, fixed income in the form of coupon except zero coupon bond. This was the main feature of bond holder would earn income in the form of interest regularly as long as the bond was valid. Generally the interest offered by the bonds were higher than that of fixed deposit.

It was noteworthy that a rule applied in the stockmarket where payment of bond interest must be prioritized before a company paid dividend to shareholders. Even in times when the position of an issued company was having liquidation, bond holder had greater rights over company assets compared to shareholders. These plus points made bonds more attractive for collection by investors.

Secondly there were three types of coupons to be received by investors, i.e. coupon of fixed interest level, coupon with foliating interest level and coupons of combined interest types. An example was PT ABC who issued bonds with 10% fixed interest for 5 years. Investor A bought 3 bonds with denominations of Rp 100 million. Under such condition, investor A would earn income of 3 X (10% X Rp 100 million) every year or income of Rp 7.5 million every three months.

Beside interest coupon, investors could also enjoy benefits in the form of capital gain in bonds, i.e. by trading the bond which they possessed. If they sell at higher price than the buying price, certainly the bond holder earn income known as capital gain.

Transaction of bonds could be done at the secondary market through dealers or brokers. Transaction of bonds were stated in terms of percentage on cost price of bond. However it was also necessary for investors to known about two main risks tied on bonds.

Firstly, probably the issuer company was unable to pay the bond coupon and returned the capital bond. The term was default. In the event that bond issuer refused to pay interest, usually payment of interest was suspended or postponed based on agreement with bond holders.

Secondly risk at interest rate level. Fluctuation of bond price was much determined by fluctuation of interest rate. Movement of bond price corresponded in reserve against interest level. Meaning if interest rate increased price of bond went down, on the contrary if interest rate went down bond prior would go up. Investors of the bond market must be keen eyed in estimating interest level so they could decide whether to keep or to sell their shares.

Such was the reason why bond was the type of investment being sought after today. Just as the way it was defined, a bond was a promissory note for lending and being received by emitents (bond issuer) from investors (buyers). Tenure of bonds had been set (generally 5 to 10 years) inclusive of interest payment, the amount and payment time of which were also stipulated in the agreement.

Firstly, bond holders had the right of vote in emitent company, but the emitent company had the right over payment of interest in full before shareholders got their dividend. Therefore fund was classified as fixed income securities since it gave relatively stable income to the bond holders. Bond issuer would pay interest also known as coupon to investors at stipulated time, for example every three months, six month or one year.

Secondly, the market price of bonds was determined by interest which was generally applicable, i.e. interest of Bank Indonesia Certificate (SBI). If SBI interest rate showed tendency to increase, market price of bonds would show downturn, but if SBI interest showed tendency of downturn, the market price of bond would increase.

Today SBI interest tend to drop, with reference to the position of BI Benchmark rate which was at the level below 5.75% so to the bond issuer, this was the momentum to release bonds because bond price tend to increase.

Thirdly, by the time price of bond increased, coupon or yields tend to be lower, and such was advantageous to bond issuer; the company could receive their fund from the people who brought the bond; and by giving coupon relatively lower while generally value of coupon remained the same until due date, bond issuer companies could benefit the fund they obtained to finance company development at present and only return the fund 5 or 10 years later depending on tenure of the bond.

Compared to the condition when the company borrowed from the bank, where credit interest from bank was higher and fluctuative compared to bond interest in the event that the company wished to increase production capacity and needed injection of fresh fund, issuance of bonds could be one of the considerable solution today. Return to be obtained from bond investment was regarded as yield, i.e. the amount to be obtained by investors whenever they placed their fund to be spent on buying bonds.

Before deciding to invest in bonds, investors must consider the size of bond’s yields, as criteria of annual yields stipulation, i.e. current yields and yield to maturity.

Currents Yield which was calculated based on number of coupon received for a year against the said bond’s price. Meanwhile, Yield to Maturity (YTM) was the level of return to be obtained by investors when they possessed bond till due date. The YTH formulas often used by players were YTM approximation or approach to YTM value. 
Business News - November 9, 2012

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