Bonds: state, corporate and other types of bonds

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Bond (Latin obligato - obligation) - one of the types of securities bearer. This is the obligation of the borrower to return the borrowed funds within a certain period of time and with certain interest.

In fact, by selling a bond, the state or organization, takes a loan from the buyer, so the holder of this security is entitled to receive annual income in the form of a specified interest. The peculiarity of a bond is that it must be redeemed over the period of time specified at its issuance.

In the financial market system, bonds are also called bonds.

McDonalds bond.

What is the essence of bonding?

The essence of bonds is similar to a loan - a certain amount of money is lent with the receipt of planned income. The difference is in the simplification of the procedure to the new creditor and the need for collateral. Investment of funds can be for a period from 1 to 30 years.

Types of bonds

Three types of bonds are distinguished by type of issuer:

Corporate bonds are the obligation of a business or firm to its creditors, the bondholders, to pay the debt and interest on it at specified dates.
State and municipal bonds operate similarly to corporate ones, only the debtor is changed.

According to the maturity of the bonds can be distinguished:

In terms of financial security, bonds can be:

Couponed - A bond that pays interest (i.e., a coupon).
Couponless or discount - securities, on which no interest payment is provided, but such bonds are put on the market at an undervalued price.
Classic or unsecured - bonds that are not secured by anything except the credit rating of the issuer (the company or the state that issues the securities).
Secured - bonds secured by some property of the issuer.

According to the type of income there are the following types of bonds:

Discount - have no coupon, the profit is generated by the discount (difference) between the nominal and current market values. The nominal price is fixed, so, naturally, the market price will increase (and profit, respectively, decrease) as the maturity date of this security approaches. Discount debt securities have a lower trading volume and prevalence than the following type.
Fixed interest rate - a debt security that has coupon income at a fixed interest rate. Coupon payments are mostly made every 4 months (sometimes every 3 months, sometimes the frequency of payments is different).
With floating interest rate - A debt security that has a variable coupon that is linked to certain macroeconomic indicators, such as rates on other securities or the refinancing rate. Such securities are issued less frequently than fixed-rate securities.

How are bond yields paid out?

The payment of income on a bond depends on its type.

So, according to fixed rate bonds income is paid in the form of a designated interest at a certain interval (e.g., annually, quarterly). For example, you bought a bond with a face value of 1000 p. with an annual rate of 8% for a period of 5 years. Obviously, the annual income will be 80 p., and at the end of the bond term, you will receive 400 p.

Floating rate bonds are linked to certain financial indicators. For example, to refinancing rate. When this indicator changes, the yield on the bond also changes. For example, you bought a bond with a face value of 1000 p. for three years, the interest on which is equal to the refinancing rate +1%. The refinancing rate changed as follows: Year 1 - 6%, Year 2 - 7%, Year 3 - 8%. Thus, the yield on such a bond will be 70+80+90=240 p.

A distinction is also made mixed bondswhich pay part of the income at a fixed rate and the other part at a floating rate.

Other types of bonds in terms of yield payout are discount bonds. There is no interest rate on them, and the income is formed at the expense of discount (price difference). For example, the issuer issues a bond with a face value of 2000 p., and sells them at 1000 p. Thus, your yield on the sale of the bond will be 1000 p.

What is the bond market?

Government and corporate bonds are in free circulation in the so-called secondary market of securities and the procedure of their purchase is similar to the purchase of shares.

On the bond market, there are so-called echelons: the first (blue chips), second and the third echelon. This is a conditional division of companies according to their size, stability, and reliability.

Accordingly, the yields of bonds from the first echelon, the so-called "blue chips" (in Russia these are Gazprom, Rosneft, Sberbank etc.), is much lower than the yields of second or third tier bonds, but the guarantees of bond repayment (i.e. debt repayment) are also significantly higher.