Types of bonds, their classification and characteristics

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Types of bonds, their classification and characteristics
Types of bonds, their classification and characteristics

To increase your savings, there are many different financial instruments. One of the most popular and demanded are bonds. This is such a broad concept that it is even difficult for many to give it a precise definition. And if we talk about the types of bonds, then in general, few people will be able to say something on the case. And it needs to be fixed.

General information

First, let's get some terminology out of the way. What is a bond? This is a debt security that serves to certify the loan relationship between its owner (aka the lender) and the person that issued it (the borrower). What does Russian law say about this? It defines a bond as an emissive security, which secures the right of its holder to receive within a specified period of time its face value and a certain percentage of it from the issuer. Although the bonds may also provide for other property rights of the holder, if this does not conflict with the legislation in force in the Russian Federation. Therefore, these securities are debttestimonies that have two main components:

  1. The obligation to pay the bondholder at the end of a certain period the amount indicated on the front side.
  2. Agreement to provide a certain fixed income in the form of a percentage of face value or other property equivalent.

Due to these properties, a bond is treated as:

  1. Promissory note of the issuer.
  2. A form of saving funds of organizations and citizens, as well as generating income.
  3. Source of investment financing from joint-stock companies.

Special Moments

buying bonds
buying bonds

Buying bonds is accompanied by:

  1. Establishing a loan relationship between the investor and the issuer. In other words, the person who buys the bond does not become a co-owner, only acts as a creditor. And can claim a certain part of the income received.
  2. There is a deadline for the circulation of a security. After its expiration, it is extinguished. This process involves the redemption by the issuer of the security at its face value.
  3. Bonds take precedence over stocks in generating income. On them, interest is paid in the first place, and only then do dividends.
  4. When liquidating an enterprise, the bondholder has the right to priority satisfaction of his claims. That is, he has the highest priority even compared to shareholders.
  5. And a little about management. Shares are title to property. They give the righttheir owners to take part in the management of the company. Whereas bonds are a loan tool. Therefore, they do not give such a right.

What types of bonds are there

Their variety is very large. Firms and even entire states can issue bonds of various types and types. Depending on which classification feature is taken as the basis, various securities are distinguished. Let's first consider the situation, based on the method of providing property:

  1. Mortgage bonds. Backed by physical assets or other securities.
  2. Unsecured bonds. No deposit required.

At the same time, they are divided into many other types, which depend on the chosen direction of activity. At the same time, it is necessary to keep in mind the dependence on risks. On this basis, certain types of bonds are also distinguished. Also, one should not forget about the nature of the circulation of the security. But let's talk about everything in order.

Mortgage bonds

corporate bonds
corporate bonds

The technology of their release looks like this. The organization issues one mortgage on which all property is transferred. It is kept in a trust company. In this case, the entire value of the property is divided into a certain number of bonds. They are purchased by individuals and legal entities. The trust company works on behalf of all investors and is a guarantee that their interests will be observed. She acts as a fiduciary of all creditors. It oversees the financi althe position of the company and its activities, working capital, the state of capital and other parameters, so that, if necessary, in time to take all the necessary measures to protect the interests of investors. The services of a trust company are paid by the organization that issued the bonds. Their relationship is regulated by a contract (agreement), where all the conditions appear. Mortgage bonds are divided into three types. Depending on the specifics of individual moments, they are:

  1. First mortgages. They are issued in cases where no securities have been offered by the organization so far. A feature is the presence of real security with physical assets. This describes all the property that is related to the pledge. Professionals are invited to assess it. This type of bond pays first.
  2. Common mortgages. Issued under the secondary pledge of property. Yes, assets can serve as collateral for multiple issues. But these are in second place compared to those considered in paragraph 1. Although they are ahead of the claims of other creditors.
  3. Bonds secured by securities. This option assumes the availability of collateral with other financial instruments. For example, securities of another organization that are owned by the issuing structure.

Unsecured bonds

bond market
bond market

They are direct debt obligations. However, no collateral is provided. The claims of their owners are on a par with other creditors. In fact, their support isthe solvency of the company. Although in this case no collateral is provided, investors are still protected. So, for example, the practice is widespread, according to which, a clause is stipulated for prohibiting the transfer of property as collateral. Thus, when needs arise, there will be assets with which you can return the invested funds. Although this is not the only defense article. There are such types of securities of this type:

  1. Bonds not backed by tangible assets. The issuer's good faith acts as a guarantee.
  2. Bonds for specific income. In this case, the securities are redeemed at the expense of the profit received in a certain case.
  3. Bonds for an investment project. All funds received are directed to the implementation of a certain development, the construction of a workshop, the expansion of activities, and the renewal of funds. Proceeds from the project are used to redeem securities.
  4. Guaranteed bonds. These are securities that, although not secured by collateral, are guaranteed by third parties.
  5. Bonds with transferred or distributed liability. In this case, it is understood that the obligations are transferred to third companies or shared with the issuer.
  6. Insured bonds. Their strength is the prediction of certain difficulties in fulfilling obligations. Therefore, securities are backed by an insurance company.
  7. Junk bonds. Securities that are used for speculation.

It should be borne in mind that Russianthe legislation establishes a restriction on the issuance of unsecured bonds.

Variety in income generation and circulation

government bonds
government bonds

We continue to consider the types of bonds. Depending on how the income will be received, allocate:

  1. Coupon bonds. What are their features? These are securities that come with a coupon when issued. It is a cut coupon, which indicates the interest rate and the date of payment.
  2. Discount bonds. These are securities that do not pay interest. But what about income? Profit is obtained due to the fact that the owner sells the bond at a discount, that is, at a price below par. But the ransom is at the specified cost.
  3. Profit bonds. This is a special variety. In this case, interest income is paid only in situations where a profit has been made. Corporate bonds are often built on this principle.

And what about the nature of the treatment? Depending on it, ordinary and convertible bonds are distinguished. What is the difference between them? And she's like this:

  1. Regular bonds. These are securities that are issued without the right to be converted into shares or other financial instruments.
  2. Convertible bonds. They en title their owner to exchange them for common stock at a set price.

About species diversity depending on the issuer

maturity of bonds
maturity of bonds

Who issued securities is very important, because from thisdepends on how risky this toolkit is. In total, there are four types: municipal, state, corporate and international. The first securities are issued by local authorities. State government countries. Corporate bonds - by commercial structures, such as a joint-stock company, a company, and the like. And international securities are those that were issued from outside.

The bond market is widely represented by all these types. Although there are specific moments. For example, government bonds can be both external and internal. In the first case, they are aimed at foreign states, commercial structures and citizens. Whereas internal ones focus exclusively on organizations and people inside. As an example, we can cite the bonds of the USSR, which were massively bought by citizens while the country still existed. It was one of the ways to allocate funds. True, it should be noted that this was carried out on a voluntary-compulsory basis. In addition, the debts of the state to the population have never been paid. Although there is an exception to this, namely, the bonds of the USSR in 1971 and 1982. Although this case is old, let's talk about something more modern.

About government bonds

They can be external and internal. The first ones are not very interesting for an ordinary layman, but the second ones … Often they are issued as bonds for individuals. They are designed to solve two problems:

  1. Opportunities to get money here and now in rubles.
  2. Earn and/or fight againstinflationary processes and the depreciation of the savings of ordinary citizens.

By the way, buying securities immediately is not recommended. The fact is that they often subsequently fall in price. And this allows you to get more money in the future. But if there is a desire to purchase federal loan bonds, then one should not forget that the services of the depository are paid, besides, there are still taxes. All these factors must be taken into account when purchasing securities. In general, the purchase of bonds can be made immediately after the issue. Or you can wait until someone loses their nerve against the backdrop of crisis events and sanctions, and he sells his securities much cheaper than the market. But this may not happen, and then it will not be profitable to invest your money. Even though federal loan bonds are not very risky, transactions with them can lead to results that are not entirely desirable. We should not forget about various possible problems, such as a sudden increase in inflation.

Where to trade securities

bond yield
bond yield

As it is not obvious, but you need a place - this is the bond market. How to get there is a completely different question. This can be done in several ways. You don't have to reinvent the wheel and follow the proven track and buy bank bonds. Where? Yes, from the very same financial institutions and buy! Fortunately, the initial price starts from ten thousand rubles. If there is a desire to invest currency, then there is an offer for this option. So buying bonds is not for the elite.

WhenIf you have at least a few million rubles, you can start thinking about government bonds. Why only in this case? The fact is that if you focus on government bonds of an internal loan, then you need to know that they are quite expensive to maintain. For their purchase and preservation, depositories are used, which require a fixed fee. And in order to benefit from securities, you need to make sure that there are enough of them. For to work by the piece is more a loss than an income. As an alternative, you can consider various mutual funds, hedges and other similar investment funds that are built on the principle of trust management. If this stage has already been passed, then it is necessary to think about the status of a qualified investor. This will allow you to turn in full force.

About timing

bank bonds
bank bonds

And one very important point was not mentioned. Namely, what is the maturity of the bonds. There are quite a few interesting points here, but we will focus on the most common options:

  1. Short-term bonds. They have a repayment period of up to five years.
  2. Mid-term bonds. They have a repayment period of five to ten years.
  3. Long-term bonds. They have a repayment period of ten to thirty years.

Usually, the longer the term, the higher the percentage. That's all. Good luck in your endeavors.