For many years in our country, a bond loan (bond) was considered a primitive way of investing.
But this state of affairs did not last long, and today it is one of the most competitive tools to increase funds. Its potential is huge: from income in the form of current interest to capital gains. But this requires mandatory knowledge of the investor: from the basic basic concepts to the specific nuances of the markets.
We'll talk more about what a bond loan is later.
Definition
Bonds are issuance securities that en title its holder to receive their face value from the issuer and the prescribed percentage of this value. If this does not contradict the law of the Russian Federation, then they may provide for other property rights.
A bond loan is a market instrument that allows enterprises or governments (issuers) to obtain the necessary amount of money through their sale to investors. The latter receivethe opportunity to increase your capital by reselling bonds after a certain amount of time at par, as well as at the expense of interest on them.
Difference from stocks
A bond loan (bond) has a similar concept with shares: both provide for payments and are listed on various exchanges.
But the first type of security is a loan obligation, and the second (shares) provides for a certain share in the enterprise.
Types of bonds by maturity
Depending on the time during which the issuer must pay off investors, there are three types of securities:
- Long-term bond issue – over 10 years redemption period. As a rule, investors are states or large financial corporations. There are various coupons for them, that is, interest is paid to its holders.
- Mid-term - from 1 year to 10 years. Designed to finance investment projects. Medium-term bond issue has the largest share in the bond market.
- Short-term - from several months to one year. It aims to cover the budget deficit and solve current financial problems. The risks are usually higher for them, despite the shortest term, as their issuers are unstable companies. But their advantage is considered to be a high face value on repurchase. As a rule, a short-term loan is zero-coupon, that is, they do notinterest is paid to the holder.
Reasons for issuing bonds
Many novice investors have a question: why should organizations become a bond issuer?
Why not use, for example, a bank loan? But there may be several reasons:
- Issuing bonds is more profitable than a bank loan.
- Bank denied loan.
- A credit institution does not have enough liquid funds, for example, for huge investment projects.
- The company needs funds for several months, etc.
Methods of income payment and repayment
There are several types of bonds by redemption method:
- Discount bonds are a type of loan that pays no interest to the investor. But its face value is much higher than the real value, that is, paid, hence the name from the word "discount" - discount.
- Coupon bonds are a type of loan on which monthly interest is paid, which is the main profit for the investor. The nominal redemption value is usually equal to the original cost.
- A mini-coupon bond is a type of loan that uses both a discount system and a coupon system. That is, small interest is paid to the investor, and the face value is slightly higher than the amount spent.
In the early 90s. last century inflation in the country was so unpredictable thata bond loan was equated with various economic indicators: the market value of real estate, the gold rate, etc.
Factors affecting the market value of a bond
Issue of bond loans is the issue of securities that are sold on stock markets. That is, bonds are sold and resold by brokers, investors, speculators, etc. If an investor has purchased a bond, this does not mean that only he has the right to demand its face value from the issuer. It is held by any person who, at the time of bond settlement, has bought the right to present settlement.
All bonds are bought and sold on the stock exchange. Their market value depends on the following factors:
- The economic situation in the industry, country, world. During various crises, investors do not want to take risks and prefer to have a “bird in their hands”. So they start selling bonds to save their money. In addition, many issuers are throwing new batches of bonds onto the market. As a rule, these are short-term, in order to stay afloat, not go bankrupt in a difficult economic environment.
- Bond maturity.
- Coupon percentage.
Government bond issue
Those who lived in the Soviet Union often came across the concept of T-bills, or government short-term bonds. This is not surprising: the authorities often asked for help from their population. At that time it was almost the only source of legal investment. There was no private propertyhence, securities too, including any kind of shares and bonds. Of course, the interest on GKOs was small, but, nevertheless, they were higher than the Savings Bank (the bank was also the only one in the country before the perestroika period).
Today government bonds are not a thing of the past. The authorities, especially in a crisis, also borrow money from the population. The main features of government bonds:
- Low yield compared to private company bonds.
- High guarantee. The state cannot go bankrupt, but, according to the experience of 1998, let's say that it can default, that is, refuse to pay debts, and this is actually the same thing.
- The low level of income, in some cases, is offset by personal income tax (personal income tax) benefits. Unless, of course, the tax resident has an official source of income.
Functioning of the government bond market
The modern GKO or OFZ (federal loan bonds) market began to function in mid-1993. For this, a whole infrastructure was created, the main components of which are:
- Ministry of Finance of the Russian Federation (OFZ issuer).
- Central Bank of the Russian Federation - performs supervisory and regulatory functions. He conducts auctions, redemptions, prepares various documents. The Central Bank is trying to maintain the level of indicators of the GKO market: profitability, liquidity, etc.
- Official dealers. These are various commercial banks, brokerage firms that attract their own funds to the market and the money of their clients to trading platforms.
- MoscowInterbank Currency Exchange (MICEX). Performs the functions of a trading platform on which all operations take place.
Investing in the future
Now more about the long-term bond issue. “Is long-term or short-term better?” many new investors ask. The question, of course, is incorrect, since everything depends on the following factors:
- Rated price.
- Level of trust.
- Interest on coupons.
There are times when it is more profitable to invest in long-term investment projects and receive lifetime interest on coupons than to invest in short-term loans, which will be inferior in terms of profitability over a distance.
Classification of a bond issue by subject of rights
By subject of rights, bonds are classified into:
- nominal;
- to bearer.
Registered bonds are issued individually by the issuer, and the interest on them goes to the investors' own accounts. Bearer bonds are not fixed by issuers, for example, exchange bonds. They are listed on stock exchanges and all transactions are recorded by special brokers.
Assessing the investment quality of bonds
Before an investor invests in bonds, it is necessary to evaluate them in the following areas:
- The reliability of the company for the implementation of interest payments is determined. To do this, you need to know the amount of its annual profit and all interest payments. If they are 2-3 times less than the company's income, then it can be trusted as a bond issuer. This state of affairs indicatesstable state of the firm. Such an analysis is best done over several years. If the trend increases (the percentage of payments decreases every year), then such a company increases its potential, if, on the contrary, the percentage of payments grows, then it goes to bankruptcy.
- Evaluation of the company on the ability to repay the debt for all reasons. In addition to bond issues, the firm may have other financial obligations, such as loans.
- Assessment of the company's financial independence. A firm is considered independent of external sources if the amount of debt does not exceed 50 percent.
Risk
Risk is the probability of loss or loss of expected profit. Investing is not a 50/50 lottery. These are balanced, pragmatic decisions. But sometimes even the most stable and successful companies fail.
To avoid mistakes and reduce risks, the stock market uses various rating and rating systems:
- A++ - maximum safety rating.
- A+ is a very good company.
- A is a good company, but its position may be unstable.
- B++ - average quality.
- B+ - below average.
- B is poor quality.
- С – speculative bonds.
