Bonds: state, corporate and other types of bonds

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What is a bond?

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.

What is the essence of bonds?

The essence of bonds is similar to a loan - the same amount of money is lent, and the same planned income. The difference is in the simplification of the procedure to the new lender and the unnecessary registration of collateral. The investment can be for a period of 1 to 30 years.

What types of bonds are there?

According to the type of issuer, there are three types of bonds: corporate, government, and municipal:

Corporate bonds are an obligation of a business or firm to its creditors, the holders of the bond, to pay the debt and interest on it at certain times.
State and municipal bonds act similarly to corporate bonds, only the debtor changes.

According to the maturity of the bonds can be distinguished:

short-term (maturity from 3 to 12 months);
medium-term (from 1 to 5 years);
long-term (more than 5 years);
indefinite.

In terms of financial security, bonds can be:

Couponed - a bond that pays interest (i.e., a coupon).
Non-coupon or discount bonds - bonds that do not provide for the payment of interest, but such bonds are put on the market at a reduced price.
Classical or unsecured - bonds that are not secured by anything other than the credit rating of the issuer (the company or state that issues the bonds).
Secured - bonds secured by some property of the issuer.

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

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

How bond yields are paid

The payment of bond yields depends on the type of bond. For example, on fixed-rate bonds, the yield 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 1,000 p. with an annual rate of 8% for a term of 5 years. Obviously, the annual income will be 80 p., and at the end of the term of the bond, you will receive 400 p.

Floating rate bonds are linked to certain financial indicators. For example, the refinancing rate. As that rate changes, so does the yield on the bond. For example, you bought a bond with a par value of R1,000 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.

There are also mixed type bonds, in which part of the income is paid at a fixed rate, and another - at a floating rate.

Another type of bond in terms of yield payments are discount bonds. There is no interest rate on them, and the income is formed at the expense of the discount (price difference). For example, the issuer issues a bond with a face value of 2,000 rubles and sells it for 1,000 rubles. Thus, your yield on the sale of the bond will be 1,000 rubles.

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 yield on first-tier bonds, the so-called "blue chips" (in Russia these are Gazprom, Rosneft, Sberbank, etc.), is much lower than the yield on second- or third-tier bonds, but the guarantees of redemption of bonds (that is, the return of debt) are much higher.