Written by Ilham Indra, Marketing Communication at PT Korea Investment Management Indonesia. Reviewed by Compliance before publication.
Bonds are the instrument Indonesians search for most, yet the ones least often explained by those who actually manage them. What appears in search results is mostly banks and news sites.
This article explains bonds from the perspective of a fixed income portfolio manager: how a bond works, what sets its value, and which risks attach to it.
What a Bond Is
A bond is a debt security issued by a government or a company to raise money, with a promise to pay periodic interest called a coupon and to return the principal on the maturity date. A bondholder stands as a lender, not an owner.
That distinction separates a bond from a share. A shareholder owns part of a company; a bondholder has lent money to the issuer.
How Does a Bond Work?
The issuer
The issuer is the borrower, either a government or a company. The issuer's ability to pay is the single most important factor in a bond's risk.
The coupon
The coupon is the interest the issuer pays periodically, usually every three or six months. It is expressed as a percentage of face value and fixed at issuance.
Maturity
Maturity is the date the issuer returns the principal. The longer the maturity, the more a change in interest rates affects the bond's price.
Face value and market price
Face value is the amount returned at maturity. The market price can differ, because bonds trade before maturity and their prices move inversely to interest rates.
This is why a bond can lose money even when the issuer pays in full: if sold before maturity while rates have risen, its price is lower.
What Types of Bond Are There?
Type | Issuer | Main characteristic |
|---|---|---|
| Government bond | The Republic of Indonesia | The lowest default risk in the domestic market |
| Corporate bond | A company | Generally a higher coupon, carrying issuer risk |
| Sukuk | Government or company | Based on sharia contracts; the return is not interest |
Government bonds are covered in a separate article, including how they work and how they are issued.
How Do You Read a Bond Code?
Bonds trade under codes showing their class and series. The prefix marks the group, while the number behind it marks the issuance series.
This article does not recommend any particular series. An investment manager licensed by the Financial Services Authority does not give buy recommendations on specific securities through educational content.
What Are the Risks of a Bond?
Risk | What it means |
|---|---|
| Default risk | The issuer cannot pay the coupon or return the principal. |
| Interest rate risk | Bond prices fall when market interest rates rise. |
| Liquidity risk | A bond cannot always be sold at a fair price before maturity. |
| Inflation risk | A fixed coupon loses purchasing power when inflation rises. |
Past performance does not guarantee future performance, and the coupon stated at issuance does not guarantee the outcome if the bond is sold early.
Buy Bonds Directly or Through a Fund?
Aspect | Buying directly | Through a fixed income fund |
|---|---|---|
| Choosing the series | Decided by the buyer | Decided by the investment manager |
| Diversification | Limited to the series bought | Spread across many series |
| Smallest entry | Follows the trading lot | Set by the investment manager |
| Costs | Transaction costs | Management and custodian fees |
Neither is absolutely better. Buying directly gives full control over series and maturity; going through a fund gives diversification and management by a licensed party.
About the Manager
PT Korea Investment Management Indonesia is an investment manager registered with and supervised by the Financial Services Authority under licence number KEP-50/D.04/2019, operating in Indonesia since 2019.
Frequently Asked Questions
How does a bond differ from a share?
A shareholder owns part of a company, while a bondholder has lent money to the issuer. Bonds carry a coupon and a maturity date; shares do not.
Can you lose money on a bond?
Yes. Bond prices fall when market interest rates rise, so selling before maturity can produce a loss even when the issuer pays in full.
What is a bond coupon?
The coupon is the interest the issuer pays periodically, usually every three or six months, expressed as a percentage of face value.
Why can a bond price differ from its face value?
Because bonds trade before maturity, and their prices move inversely to market interest rates.
Is it better to buy bonds directly or through a fund?
They differ rather than one being better. Direct purchase gives control over series and maturity; a fund gives diversification and management by a licensed party.
Are bonds covered by deposit insurance?
No. A bond is not a bank deposit and is not covered by the Deposit Insurance Corporation.
Next Steps
Understand fixed income funds as a diversified way to hold bonds.
See the range of funds managed by PT Korea Investment Management Indonesia on the Products page.