Understanding Bonds Terminology and Its Driving Factors

Bonds are debt securities issued by companies or governments to meet their financing needs. They can be issued with different maturities (tenors) and in various currencies. To learn more about bonds, including their benefits and risks as an investment instrument, please visit the link below.

Bonds Terminology

To better understand Bonds, let's learn some common terms that are often used:

• Tenor: Period until a bond matures, usually classified as short-term (maturing in 1–5 years), medium-term (maturing in 5–10 years), and long-term (maturing in more than 10 years).
• Coupon: Interest earned by investors over a certain period. Coupon payments are usually made monthly or every 6 months.
• Purchase/Sale Price: The price investors pay or receive when buying or selling Bonds, which can be categorized as follows:
  • Par Price: investors pay =100% when purchasing Bonds and will receive 100% when the Bond’s mature. This generally occurs in the Primary Market when the Bonds are issued.
  • Premium Price: investors pay >100% when purchasing Bonds, but the Bond’s price will return to 100% when it matures.
  • Discount Price: investors pay <100% when purchasing Bonds, but Bond’s price will return to 100% upon maturity.
• Capital Gain/Capital Loss: Potential profit or loss investors may experience when selling Bonds before maturity. Value is determined by the difference between selling and purchase prices, after accounting for transaction costs.
  • Capital gain:Occurs when selling price is higher than purchase price.
  • Capital loss:Occurs when selling price is lower than purchase price.
• Yield to maturity (YTM):  Average annual return (expressed as a percentage) earned by investors who hold Bonds until maturity. YTM considers price, coupon, and tenor. Higher YTM means higher potential return, and vice versa.
• Duration: Measures price sensitivity to yield changes, or how much a Bond’s price may rise or fall when yield fluctuates. Higher duration means greater price volatility, and vice versa. Duration is not the same as tenor (time remaining until a Bond matures). For example, FR101 maturing in 2029 (tenor = 4 years, duration = 3 years) will experience smaller price changes compared to FR079 maturing in 2039 (tenor = 14 years, duration = 9 years). Duration information is available at: XXXXXX (Duration Appendix List).

Bond Price Factors

Although Bonds pay regular coupons, Bond price fluctuations depend on a country’s economic conditions, inflation, and interest rates. The following illustration shows how inflation and interest rates affect Bond yields and prices.

When inflation rises (economic conditions are solid and people's purchasing power is high), the central bank may raise the benchmark interest rate. When the benchmark interest rate is high, deposit yields tend to increase as well, making them just as attractive as Bond yields. This encourages investors to invest in deposits. As a result, Bond yields must rise (prices fall) to regain investor interest in investing in Bonds.

When inflation begins to decline (weak economic conditions and lower purchasing power), the central bank may lower its benchmark interest rate. When the benchmark rate is low, deposit yields also tend to decrease, making them less attractive. Investors then look for other instruments offering better returns, such as Bonds. As a result, demand for Bonds increases, pushing Bond prices higher.

In conclusion, bonds tend to be one of the main investment choices when the economy slows down, inflation is low, and interest rates are declining.

How to Choose Bonds?

In general, investors can be grouped into two types:

1. Traders – have a short investment horizon & tend to make frequent portfolio adjustments. They usually buy Bonds that are actively traded in the market (which typically have a smaller difference between buying and selling prices). 
2. Investor– have a longer investment horizon & aim to hold Bonds until maturity. They usually prefer Bonds with the highest YTM (which are priced lower compared to other series with the same tenor)

YTM (Yield to Maturity) is the best indicator to help you choose Bonds wisely, as it considers important factors such as price, coupon, and tenor. Here’s a simple illustration:

Data as of June, 5 2025

Explanation:

1. The three Bonds above have similar tenors (~5 years).
2. The higher the coupon and the longer the tenor, the higher the price will be.
3. FR082 = highest coupon, highest price.
4. FR104 & FR087 have the same coupon rate, but FR104 has a higher price (lower yield) because it serves as the benchmark Bond, making it more liquid than FR087.
5. With nearly identical tenors, FR087 offers the most attractive yield to maturity (YTM) compared to the other two series.

For new investors or those looking for more diversified investments, you can also explore and purchase Fixed Income Mutual Funds (RDPT).

So, what are you waiting for? Start investing in Bonds now through the Investment feature on the myBCA app!