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There are several sources of state and local income that governments can use to finance their projects. There are also non-state income tax (PNBP) grants. foreign debt, etc. One of them is government bonds.
What are government bonds?
Government bonds are debt instruments issued by the central and local governments. in some literature Government bonds are often referred to with other terms such as: government bondsPublic Debt, Treasury Bills, Government Securities (SUN) and so on
The issuance of such bonds has two purposes: as a tool for fiscal policy. and as a tool for determining monetary policy. Government bonds become fiscal policy due to funding from this source. Governments can provide funding for their projects. Bonds are instruments of monetary policy. because with these bonds The government will reduce the amount of money circulating in the community to control inflation.
in Indonesia There are at least two types of bonds circulating in the community: Government Bonds (SUN), Sharia Securities (SBSN). These two bonds, or SUK, are reduced by several brands depending on the type and the target investor, such as State Retail Bonds. (ORI) and Retail Sukuk (Sukri) for retail investors
Institutional or individual investors can buy government bonds. depending on the brand There are debt securities that institutional investors buy especially for financial purposes. while other bonds are issued exclusively for retail investors.
The advantages of government bonds
1. Low-risk investment
Government bonds are: low risk investmentespecially if published by the federal government. not local government
The reason is that federally issued bonds are usually paid. unless the country’s central government is bankrupt As for local government bonds, you need to be more careful. Because there are many cases in which this type of debt instrument cannot be paid.
2. Investing with suitable capital
The issuance of government bonds in Indonesia has been around since the old order era. However, over the past 20 years, the country’s government has continued to innovate. Continually providing investment tools with purchasable capital.
Currently, there are many government bond products that can be purchased for as little as Rs 1,000,000 in the main market. not only that even now State bonds cannot be bought only at banks. They can also be purchased through stock trading apps and mutual fund supermarket apps.
3. Potential hidden income
same as stock Bond investors have the opportunity to earn passive income from raising capital in the secondary market. The difference is that stock investors receive dividends. while bond investors receive coupons. The amount of this coupon is higher than the bank deposit interest rate. the difference is Coupons for government bonds have a fixed rate (fixed rate) and are paid monthly until maturity. This means that you will receive a fixed income.
4. Invest in real projects
One of the advantages of investing in government bonds compared to corporate bonds is that The money raised from these bonds is used to actually run the project. For example, ORI is used to fund projects. related to COVID or other examples of retail sukuk funds used for various infrastructure projects.
5. The right investment during a recession
With such a low level of risk, it is not surprising that many investors are looking for government bonds during a recession. As a result, the demand for bonds in the secondary market has increased.
defect
1. Low returns
One disadvantage of government bonds is their low yields. high risk, high returnBecause the level of risk in investing in this tool is low. It should come as no surprise that governments offer coupons at lower rates than corporate bonds or stocks. even if it is higher than the deposit
2. Non-inflationary rate of return
As mentioned above The government bond coupon has been fixed (fixed rateThe disadvantage of the fixed rate is that the yield of this instrument does not respond to changes in inflation. To answer why this is important Let’s see an example
ORI A will issue a 5% coupon when Indonesia’s inflation rate is 4%. Because the purchasing power of money is eroded by inflation, ORI A’s net profit is only 1% if the inflation rate in Indonesia increases to 6% next year. Investors will not earn and will lose real money. Therefore, government bond prices generally fall as the economy recovers from recession and inflation increases.
3. Interest Rate Risk
In addition to inflation The enemy of bonds is the benchmark interest rate (BI7DRR). The benchmark interest rate will also rise. In theory, an increase in the benchmark interest rate will lower the bond price.
This is because higher interest rates encourage investors to switch to other financial instruments that offer higher yields or are more accessible. These other financial instruments, such as newly issued high-interest stocks or bonds, or deposits with an easy disbursement process.
The interest rate risk is exacerbated if the bonds involved are long-lived. For a more complete discussion on this topic Please read the article. “Effects of Bond Interest Rates”.
4. Quite liquid
Bonds are more difficult to liquidate than money market instruments such as deposits, as well as stocks. bond redemption You must go through a settlement process which can take 2-7 business days.
Unlike bank deposits which can be withdrawn in as little as 1 hour (unless you are queuing at the bank) or money market funds which can be withdrawn in 2 business days or less. This shortcoming makes this tool unsuitable for emergency funds.
Some important factors
Just like any other investment tool, you need to consider a number of factors before buying government bonds. Here are some of them:
- Using the money charged on debt instruments
- If you are unsure of the ability of the federal government to pay You can find details in the state budget appropriations (APBN) and expert analysis.
- Credit rating from a securities rating agency
- The future development trend of inflation and interest rates
- various technical indicators It is important to buy this tool on the secondary market.
State bonds are a tax-excluded source of state income. subsidy and foreign debt By purchasing this tool, you make an indirect contribution to the development of the country.
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