exchanging debt value into obligations
While the conversion option is bidding for the bonds by exchanging debt value into obligations into shares. With this option, investors who had become the lender, after the due date will be shifted to the owners of capital in the companies that issued convertible bonds.
According Yunianto Handy, an analyst with PT Mandiri Securities bonds, each of the above classification has a level of risk varies. Therefore, trading characteristics of each type of bond was to be different too.
“The price of bonds that are formed in the secondary market will follow the level of risk and expectations YTM respectively. For, as the closer when due, then the rate of return and risk of each bond product will vary. This is affecting price, “he said at the Independent Club last week.
In bonds in the secondary market transactions, price calculation used is totally different from the calculations in stock trading. Prices used were measured in percentages, not the rupiah denomination.
At the time bonds are issued, then the bond price will be at a level of 100% or commonly known as Par prices. YTM rate when issued was equivalent to the coupon interest rate offered.
As an illustration, a company issuing bonds worth Rp 1 billion 5-year term with a coupon rate of 7.5% per annum and is payable every 6 months.
At the time of publication, the price of these bonds are priced with a YTM of 7.5% Par. That means, if the bond holders decide not to sell these bonds to maturity, the bondholders will receive the funds by 100% (USD 1 billion) at maturity plus accrued interest at 7.5% per year multiplied by 5 (USD 375 million) or a total of Rp 1.375 billion.
However, if an investor buys bonds in the secondary market in the second year, it means the rate of return that would be obtained were different. Because, he did not get the coupon payment before he bought the bonds.
Consequently, the purchase price of bonds in the secondary market was not likely he bought at a price of Par.
In simple terms it can be said that bond prices in the second year will be below the price of Par, call it 98%. Therefore, investors will pursue the difference in the level of return that is obtained by placing a buy position at a price below the price of Par.