Understanding Debt Instruments: Types, and Examples

Understanding Debt Instruments – For those who have been involved in the business and financial world for a long time will certainly understand more about the various terms in it. One of them is debt instruments. However, for those who are new, of course there are still many who do not understand the meaning of debt instruments.

Therefore, in this article we will discuss the terms of debt instruments along with examples of these terms in full.

What Are Debt Instruments?

A debt instrument is an asset that requires regular payments to all its holders, generally using interest. In addition, a debt instrument is also a documented and binding obligation that provides funds to entities in return for the entity’s promise to make repayments to lenders in accordance with the contract or agreement that has been made.

The debt instrument contract contains all the detailed provisions regarding the agreement, namely the collateral involved, the interest rate, the interest payment schedule, as well as the period until maturity if applicable. This debt instrument also provides capital to entities that promise to pay back the capital from time to time. Credit cards, lines of credit, loans, and even bonds can all be used as types of debt instruments.

The term debt instrument primarily has a focus on debt capital collected by institutional entities. Because this institutional entity can include the government, private companies, and also the public. Credit cards and lines of credit are types of debt instruments that can be used by institutions to obtain capital. This revolving line of credit generally has a simple arrangement and only with one lender.

Debt security instruments are sophisticated and structured debt instruments to be issued to various investors. More complex debt instruments will certainly require the creation of extended contracts as well as the involvement of many lenders who generally invest through the organized market.

Who uses debt instruments?

Generally, the term debt instrument has a focus on debt capital issued by an institutional entity. Institutional entities can include the government, private and public companies.

Debt instruments provide capital to entities that promise to repay the capital from time to time. Because the issuance structure allows capital to be obtained from many investors, the entity issues these debt securities instruments. Debt securities can be arranged with long or short term.

Long-term debt securities require payments to investors within a period of up to more than one year. As for short-term debt securities paid back to investors and closed within a period of one year. Entities generally organize debt security offers for payments ranging from one month to 30 years.

These revolving credit lines generally have a simple structure and only one lender. They also generally have no connection with the primary or secondary market for securitization.

More complex debt instruments will involve contract structures as well as the involvement of many investors or lenders who generally invest through an organized market.

Types of Debt Instruments

Based on the repayment period, the types of debt instruments are divided into two types, namely:

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1. Short-term debt

Short-term debt generally has a short repayment period of less than 1 year.

2. Long-term debt

Long-term debt has a relatively longer maturity period. Generally up to more than one accounting period of 1 year. It can even be longer than that.

Examples of Debt Instruments in Indonesia

According to the type of debt, the issuance market for institutionalized entities varies greatly. The types of debt instruments that can be used by institutions to obtain capital are credit cards and lines of credit. In addition, there are loans and obligations. Everything can be a type of debt instrument.

Some things that are usually used as debt instruments are:

1. National Bonds

National Debt is a valuable document in the form of a letter of acknowledgment of debt in Rupiah currency or foreign currency that is guaranteed payment of principal and interest by the Republic of Indonesia, in accordance with the validity period.

The management of this National Debt Bond has been regulated in Law Number 24 of 2002 on National Debt Bonds, which provides certainty that:

  • SUN publications are only for a specific purpose.
  • The government is obliged to pay the interest and principal of the SUN that has fallen due.
  • The amount of SUN that will be published each budget year must obtain the approval of the DPR and be consulted in advance with Bank Indonesia.
  • SUN trading is regulated and supervised by the authorities.
  • Provide heavy and clear legal sanctions against publication by parties who do not have authority and or forgery of SUN.

Purpose of Issuance of National Bonds

SUN is not simply published, but with specific purposes, including the following:

  • Financing the APBN deficit.
  • Cover short-term cash shortages.
  • Manage the national debt portfolio.

The central government has the authority to issue SUN after obtaining the approval of the DPR which is confirmed within the framework of the approval of the APBN and after consulting with Bank Indonesia.

Terms in SUN

Different investment instruments, different terms that exist and are related in it. When talking about SUN, there will generally be 2 terms that are often used, namely maturity and interest or coupon.

Reader need to know that SUN certainly has a period of validity. That is, the government will return the investor’s principal funds after the due date or the time is up. As for the maturity itself, it actually has various variations, starting from 3 months and some even reaching up to 30 years.

Meanwhile, interest and coupons are rewards given to investors or buyers of SUN. This coupon is calculated as a percentage of the principal amount and time per year. However, the payment can be made at a discount or every three months.

Types of SUN

In accordance with Law Number 24 of 2002, SUN has 2 types, namely:

1. National Treasury Letter (SPN)

National Treasury Bill (SPN) is a SUN that has a maximum term of 12 months and interest payments are made at a discount. In some countries SPN is better known as Treasury Bills or T-Bills. SUN with this type is generally intended for large investors.

2. National Obligations (ON)

National Obligations are SUNs that have a term of more than 12 months with coupons or interest payments made at a discount. Government Bonds with coupons have a periodic coupon payment schedule (one, three months or six months).

While ON without coupons does not have a coupon payment schedule. In Indonesia itself there are 3 types of national bonds that are sold in a retail way, among others:

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1. ORI (Indonesian Retail Bonds)

ORI is the oldest retail bond ever issued by the Indonesian government. The first ORI with series ORI001 was issued in July 2006. In general, 1-2 ORI are issued each year. In October 2022, the government plans to issue ORI011.

According to analysts’ estimates, retail bonds with a tenor of three years will offer a coupon with a percentage between 7%-8.75%. This yield is slightly different when compared to deposit interest, which according to the Money Market Information Center averages 7.11% (1 month) and 6.8% (12 months).

The government itself has a target to be able to absorb up to Rp20 trillion from the publication of ORI011, which is relatively the same as ORI010 which amounts to Rp20.21 trillion.

2. SBR (Retail Savings Bond)

SBR is a National Obligation that is sold to individuals or individuals Indonesian Citizens through Distribution Partners in the domestic Primary Market that cannot be traded in the secondary market.

The characteristics of SBR are the floating minimum rate and the early redemption facility .

3. Retail Sukuk (SR)

SR is a national obligation that is sold to individuals or individuals Indonesian Citizens through Distribution Partners in the domestic Prime Market that has a sharia basis. When Reader is looking for an investment product that is truly in accordance with sharia, maybe SR is the right answer because it has been guaranteed by MUI.

SR is almost the same as ORI in its characteristics, where there is a fixed rate every year and there is a secondary market.

2. Mortgage

Mortgage in the Big Indonesian Dictionary has the meaning “credit given on the basis of collateral in the form of immovable property.”

Guarantees in the form of assets or immovable things such as land, buildings, houses, and apartments.

Meanwhile, quoted from the Financial Services Authority, a mortgage is a debt instrument with the granting of a lien from the property as well as the borrower to the lender as a guarantee for its obligations; in this case the borrower can still benefit or use the property; The lien on the property expires after the obligation is paid off ( mortgage ).

Borrowers can have a house by paying off the mortgage debt, which is the value of the house along with the interest. If the borrower fails to repay the mortgage debt, then the object of the guarantee becomes the property of the creditor (lender).

3. Obligations

Obligations is a term in the capital market that means a debt statement to bondholders. Facilities from bond issuers where the party with the debt and the bond holder are the debtors. When a person has an obligation, it will usually be written when the debt is due, along with the coupon (interest) that is the responsibility of the obligation holders.

In Indonesia, generally the period that applies to this obligation is from 1 to 10 years. Then, the issuance of this bond has the purpose of collecting funds from the community which is used as a source of funding.

One of the reasons why bonds are in demand until now is because bonds can be traded and the level of security from bonds can be said to be quite good. This fairly good security is because the obligation has a connection with the government so that the process is safer and more accurate.