| Bond |
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| Written by Administrator |
| Tuesday, 10 November 2009 01:23 |
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A bond is an instrument in which the issuer (debt or borrower) promises to repay to the lender/investor the amount borrowed (principal) plus interest (coupon) over some specified period of time. The issuer may be a corporation or government. The interest is usually paid at specified intervals, such as semi-annually or quarterly. When the bond matures, the investor receives the entire amount invested, or the principal plus coupon. Once issued, bonds can be traded like any other security before its mature without paying penalty which is unlike in average time deposit (ATD).
Type of Bonds traded in Indonesia Stock Exchange: 1. Corporate Bonds: Bond issued by state owned company or private company.
2. Government Bonds: Bond issued by the central government.
3. Municipal Bond: Bond issued by province/district government for financing public utilities project.
4. Retail Bonds: Bond traded in a bourse trading mechanism as applied in stock trading with relatively small nominal value.
5. Sharia Bond: Bond which has yield refers to profit sharing of the bond issuer but not relay on interest based. In term of its yield, there are two type of calculating, as follows:
· Sharia Mudharabah Bond is a sharia bond with initial contract base on profit sharing so that investor may receive income after knowing revenue of the bond issuer.
· Sharia Ijarah Bond is a sharia bond uses such as leasing contract so that ijarah’s fee (like a coupon) will be in fix rate and it can be known or counted from the initial issued.
The different type of coupon:
1. Zero Coupon Bonds: Bond which has no coupon along the period of its time maturity, but, Bond issuer will pay its principal on the maturity date.
2. Coupon Bonds: Bond which has a coupon which is able to convert in cash money on specified period of time according to the issuer’s provision.
3. Fixed Coupon Bonds: Bond which has fix amount of coupon rate from the time of initial issued until maturity date. Fix coupon bond will be paid at specific period of time.
4. Floating Coupon Bonds: Bond which has coupon rate that is usually keep on adjusting to the reference rate in the market, such as weighted average of interest rate of average time deposit (ATD) in the biggest government bank or private bank.
5. Mixed rate bonds: Bond has a fix coupon rate only for certain period of time (e.g. 1- 3 year) then it will be floating follow the market rate.
The characteristics of Bonds:
Bonds Pricing:
Different to stock’s price that is expressed in currency unit (rupiah amount), bond’s price is expressed in percentages (%) unit that is percentages of its nominal value. There are 3 (three) possibility of the bond’s price offered to the market:
Bond Yield :
Return on bond investment will be stated as yield that is source of income for the investors who allocate their money to buy a retail bond/corporate bond/government bond. One of the important thing that is to be considered before they decide to invest in bond is the amount of bond yield as a measurement tool to know the annually rate of return.
There are two terminologies in calculating yield, current yield and yield to maturity.
Current yield = Coupon x 100%
Price
Example:
Bond issuer “PT. XYZ”, gives coupon rate 17% p.a. to their bond holder while bond traded at 98% with nominal value Rp 1.000.000.000, then its current yield as follows:
Current Yield = Rp 170.000.000 or 17% x 100%
Rp 980.000.000 98%
= 17.34%
YTM approximation = C + R - P
n x 100%
R + P
2
Explaination:
C = cupon
n = period of time to maturity (in year)
R = redemption value
P = purchasing value
Example:
Bond XYZ was bought on September, 5-2003 at 94.25% with coupon rate 16% which will be paid quarterly and its maturity date on July, 12, 2007. What is YTM approximation of Bond XYZ?
C = 16%
n = 3 year, 10 month, 7 day or equal to 3.853 year
R = 94.25%
P = 100%
YTM approximation = 16 + 100 – 94.25
3.853
= 100 + 94.25
2
= 18.01 %
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