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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.

But what happens in the market is not as simple as that. According to Handy, in addition to these factors, there are other factors that make investors provide different offerings in the secondary market.

“Determinants of bond prices is the biggest factor is interest rates,” he explained.

Continuing the illustration above, if when he bought bonds earlier in the second year, where interest rates have decreased to as low as 6%, then the movement of bond prices in the secondary market will depend largely on expectations of interest rate trends.

Illustration like this, if investors are speculating the future trend of interest rates will go down, call it to the level of 5%, then he will put up bidding to buy at prices above the price of Par.

“In this way, he will have a YTM of getting bigger in the future in line with the downward trend in interest rates,” said Handy.

Conversely, if investors are projecting the future interest rates will go up, call it to the level of 8%, then the consequences will be receiving the projected yield will decrease.

“Therefore, to still get a big yield, he would put the price bid under Par,” said Handy.

Handy explained that the simple formula as follows:

If SBI is projected to decline, YTM will decrease, then prices will tend to rise.
If BI is projected to rise, YTM will go up, then prices will tend to fall.

Therefore, further Handy, to play bonds in the secondary market, investors should pay attention to the calculation of projected trends in interest rates. Therefore, the trend in interest rates greatly affect the movement of bond prices in the secondary market.

“Factors to be considered is the trend of inflation in the future. Therefore, the trend of inflation go hand in hand with the trend of interest rates (SBI). If inflation rises, the SBI will go up also, conversely, if inflation goes down, then SBI will come down anyway,” he said .

Well, talk about the macro economic conditions in the future Indonesia, said the latest projections into the second half of 2010 will be a global economic recovery. This recovery will certainly include Indonesia in it.

“Economic recovery is usually accompanied by rising inflation which of course will cause an increase in interest rates higher,” said Handy.

By simple logic, it can be assumed, in the future will happen, which means higher interest rates would make bonds YTM products has increased as well.

Then the consequences will be a decline in bond prices in the secondary market ahead of the second half of 2010.

“The decline in prices and the adjustment as it already started to happen from now. Investors seem to have anticipated the projected rise in interest rates early on. For investors who speculate in interest rates will rise right in the second semester, it would be better to buy now because prices are still high, thus received YTM will be greater,

Investing in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments. Graham illustrated this with the analogy of “Mr. Market”, the imaginary business partner of each and every investor. Mr. Market offers investors a daily price quote at which he would either buy an investor out or sell his share of the business. Sometimes, he will be excited about the prospects for the business and quote a high price. At other times, he is depressed about the business’s prospects and will quote a low price.

Because the stock market has these same emotions, the lesson here is that you shouldn’t let Mr. Market’s views dictate your own emotions, or worse, lead you in your investment decisions. Instead, you should form your own estimates of the business’s value based on a sound and rational examination of the facts. Furthermore, you should only buy when the price offered makes sense and sell when the price becomes too high. Put another way, the market will fluctuate – sometimes wildly – but rather than fearing volatility, use it to your advantage to get bargains in the market or to sell out when your holdings become way overvalued.

Here are two strategies that Graham suggested to help mitigate the negative effects of market volatility:

• Dollar-Cost Averaging

Dollar-cost averaging is achieved by buying equal dollar amounts of investments at regular intervals. It takes advantage of dips in the price and means that an investor doesn’t have to be concerned about buying his or her entire position at the top of the market. Dollar-cost averaging is ideal for passive investors and alleviates them of the responsibility of choosing when and at what price to buy their positions.

• Investing in Stocks and Bonds

Graham recommended distributing one’s portfolio evenly between stocks and bonds as a way to preserve capital in market downturns while still achieving growth of capital through bond income. Remember, Graham’s philosophy was, first and foremost, to preserve capital, and then to try to make it grow. He suggested having 25-75% of your investments in bonds, and varying this based on market conditions. This strategy had the added advantage of keeping investors from boredom, which leads to the temptation to participate in unprofitable trading (i.e. speculating). (To learn more, read The Importance Of Diversification.)

• Know What Kind of Investor You Are

Graham advised that investors know their investment selves. To illustrate this, he made clear distinctions among various groups operating in the stock market.

Active Vs. Passive
Graham referred to active and passive investors as “enterprising investors” and “defensive investors”. You only have two real choices: The first is to make a serious commitment in time and energy to become a good investor who equates the quality and amount of hands-on research with the expected return. If this isn’t your cup of tea, then be content to get a passive, and possibly lower, return but with much less time and work. Graham turned the academic notion of “risk = return” on its head. For him, “Work = Return”. The more work you put into your investments, the higher your return should be.

If you have neither the time nor the inclination to do quality research on your investments, then investing in an index is a good alternative. Graham said that the defensive investor could get an average return by simply buying the 30 stocks of the Dow Jones Industrial Average in equal amounts. Both Graham and Buffett said that getting even an average return – for example, equaling the return of the S&P 500 – is more of an accomplishment than it might seem. The fallacy that many people buy into, according to Graham, is that if it’s so easy to get an average return with little or no work (through indexing), then just a little more work should yield a slightly higher return. The reality is that most people who try this end up doing much worse than average.

In modern terms, the defensive investor would be an investor in index funds of both stocks and bonds. In essence, they own the entire market, benefiting from the areas that perform the best without trying to predict those areas ahead of time. In doing so, an investor is virtually guaranteed the market’s return and avoids doing worse than average by just letting the stock market’s overall results dictate long-term returns. According to Graham, beating the market is much easier said than done, and many investors still find they don’t beat the market. (To learn more, read Index Investing.)

Speculator Vs. Investor
Not all people in the stock market are investors. Graham believed that it was critical for people to determine whether they were investors or speculators. The difference is simple: an investor looks at a stock as part of a business and the stockholder as the owner of the business, while the speculator views himself as playing with expensive pieces of paper, with no intrinsic value. For the speculator, value is only determined by what someone will pay for the asset. To paraphrase Graham, there is intelligent speculating as well as intelligent investing – just be sure you understand which you are good at.

Warren Buffett is widely considered to be one of the greatest investors of all time, but if you were to ask him who he thinks is the greatest investor he would probably mention one man: his teacher, Benjamin Graham. Graham was an investor and investing mentor who is generally considered to be the father of security analysis and value investing.

His ideas and methods on investing are well documented in his books, “Security Analysis” (1934), and “The Intelligent Investor” (1949), which are two of the most famous investing texts. These texts are often considered to be requisite reading material for any investor, but they aren’t easy reads. Here, we’ll condense Graham’s main investing principles and give you a head start on understanding his winning philosophy is the principle of buying a security at a significant discount to its intrinsic value, which is thought to not only provide high-return opportunities, but also to minimize the downside risk of an investment. In simple terms, Graham’s goal was to buy assets worth $1 for $0.50. He did this very, very well.

To Graham, these business assets may have been valuable because of their stable earning power or simply because of their liquid cash value. It wasn’t uncommon, for example, for Graham to invest in stocks where the liquid assets on the balance sheet (net of all debt) were worth more than the total market cap of the company (also known as “net nets” to Graham followers). This means that Graham was effectively buying businesses for nothing. While he had a number of other strategies, this was the typical investment strategy for Graham. (For more on this strategy