Bonds and Medium Term Notes (MTN) are a type of debt-based securities that are permitted to be a basic asset of a mutual fund. The following is what distinguishes Bonds from MTN.
Time of Maturity
As debt-based securities, both Bonds and MTNs have maturity. The difference is the bond maturity varies between 370 days to 30 years. While for MTN usually only ranges between 1-5 years
Bond issuers generally can be government and corporations, while issuers from MTN are only corporations. It is possible for companies to issue MTN and Bonds at once.
The bonds are in accordance with the information contained in their prospectus, some are guaranteed by assets specifically, without special guarantees (clean basis), and without collateral at all (subordinated bonds). While for MTN, it is generally in the form of a clean base.
Clean base is usually a guarantee that is not a company asset that has been used as collateral. Suppose a company has assets in the form of buildings that have been pledged to the bank, then when a default occurs, the proceeds from the sale of the building cannot be paid to the bondholders or MTN.
Bonds are offered through a public offering mechanism. Public offerings are defined as offering using mass media or offered to more than 100 parties and have been sold to more than 50 parties. While MTN is offered on a limited basis and is owned by a maximum of 49 parties.
The public offering scheme on bonds has stricter requirements and a longer process for companies than MTN offers that are only to certain parties.
Securities Rating / Rating
The biggest risk of debt securities is the risk of default. To facilitate the public in assessing the risk of default, one of the indicators used is a rating or rating issued by a securities rating company such as PT. PEFINDO or PT. Fitch Rating Indonesia.
The rating standard is the Investment Grade category from AAA, AA, A and BBB and Non Investment Grade from BB, B, CCC, and Default.
In many cases, the rating between bonds and MTN is usually the same because the focus is not on how many companies owe but the company’s ability to fulfill its obligations.
Coupons are the rate of compensation paid to holders of debt securities. The coupon amount is usually determined by the time period and rating of the company.
In theory, the longer the time period, the greater the coupon given and vice versa. For example, a debt with a period of 5 years will usually give a bigger coupon than a debt with a period of 2 years.
For ratings, usually the higher / better the rating of the company, the smaller the coupons given and vice versa. For example, companies with AAA Ratings will pay smaller coupons than companies with rating A.
The bidding method is also influential. Bonds offered through the public offering scheme have stricter requirements and a greater potential number of buyers, for this reason, the coupons given may be smaller than MTN whose owners are limited to only 49 parties.
The nominal amount for the minimum investment varies greatly. For Retail type government bonds such as ORI and Retail Sukuk, the minimum investment can start from IDR 5 million. While for FR series government bonds (Fixed Rate), it usually requires a minimum of IDR 1 M or even greater. The same is true for Corporate bonds.
For MTN, because the buyer is limited to only 49 parties, the minimum purchase can be from IDR 5M to tens of M to reach the quota target the company wants to issue.
Transactions on the Secondary Market
Although in the form of debt securities, both bonds and MTN can be traded before maturity. In practice, only FR series government bonds are actively traded. Meanwhile, corporate bonds are rare. MTN is less frequent so most investors hold it to maturity.
Bonds and MTN in Mutual Funds
Bonds and MTN are often found in mutual funds whose profiles are conservative, namely fixed income funds and protected mutual funds.
The investment policy of both mutual funds in accordance with OJK regulations is a minimum of 70 percent for protected mutual funds and a minimum of 80 percent for fixed income mutual funds must be invested in debt-shaped securities.
The types of securities that can be a basic asset of a mutual fund are specifically regulated in Article 5 of OJK Regulation Number 23 / POJK.04/2016 concerning Mutual Funds in the Form of Collective Investment Contracts.
In articles 5 A and 5 C, it is stated that Investment Funds in the Form of Collective Investment Contracts can only be in the form of:
5.a. Securities offered through Public Offering and / or traded on Stock Exchanges both at home and abroad and
5.c. Fixed-income Debt Securities or Sharia Securities offered not through a Public Offering and have received a rating from a Securities Rating Company;
Based on the OJK Regulation above, the Bonds fall into the category according to article 5 A and MTN falls into the category according to article 5 C.
In terms of liquidity, fixed income mutual funds are a type of mutual fund that investors can buy and sell at any time. For this reason, the choice falls more on bond instruments with better liquidity, aka more transacted in secondary markets such as government bonds and corporate bonds. Even if there are, there are fewer portions of MTN.
While for protected mutual funds, because they can only be purchased at the beginning of the offering period and held to maturity, liquidity is not the main consideration so that it can be in the form of MTN and or Bonds.
In terms of investment policy, the maximum placement in 1 company in fixed income mutual funds is limited to a maximum of 10% except government bonds. So that in theory, the minimum company contained in fixed income mutual funds is 10 companies.
While in protected mutual funds, investment managers are given the freedom to place 100 percent of managed funds in just one company.
If there is a risk of default on bonds or MTN, then the fixed income fund loses at most 10 percent of the value of its investment, while in protected mutual funds, the loss can reach 100 percent.
For this reason, when investing in protected mutual funds, the main focus of investors is on the risk of default on companies issuing MTN and Bonds. The party offering such a Bank Selling Agent or Investment Manager does not provide a guarantee if a default occurs.
For investments in fixed income mutual funds, the risk of default remains even though it is smaller because it is diversified. But because it can be traded at any time, mutual fund prices can fluctuate.
Rising interest rates can cause prices of fixed income mutual funds to go down and vice versa. For this reason, investors need to pay attention to changes in macroeconomic data such as interest rates and inflation and realize that there is a risk of price decline despite the profile of conservative mutual funds.
Thus this article, hopefully useful.
This article was published in Leopar Online June 22, 2018 with Link as follows “This is the Difference of Bonds and MTNs that Become Funds Basic Assets”
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