A bond is a type of securities that serves as a confirmation of the owner's right to receive a certain amount of money from the issuer. Investments in bonds are considered the most reliable instrument in the securities market.
The concept of bonds and their difference from stocks
Essentially, a bond is an IOU. This security serves as a confirmation that the company that issued it borrowed a certain amount and undertakes to return it along with interest after a certain period. A bond is a stable security with low risks. It is quite convenient for investors, because allows you to calculate its profitability and risks even before buying.
How are bonds different from stocks? The purpose of the issue of both securities is to attract free capital by the issuer. The main difference is in the nature of these securities. When buying a bond, the investor gives the company (the state) a certain amount of debt, when buying shares - he gets a share in the company and can participate in its management.
The difference is also observed in the mechanism of income generation. Shares allow the owner to receive dividends and profits from the growth of their price. If the share price falls, the investor may remain in the red. Thus, the receipt of income from the purchase of shares is not guaranteed. Bonds, on the other hand, imply a profit in a fixed amount and a refund of the purchase price (par value). In this case, interest on bonds is paid first, while dividends are paid from the company's profits. Consequently, bonds are low-risk instruments, while stocks are high-risk financial assets.
Another difference is that shares are only issued by private companies, while bonds can be corporate and government.
Types of bonds
There are many parameters for classifying bonds.
By the type of issuer (issuing party), bonds are divided into state and municipal, as well as foreign, corporate.
According to the maturity of bonds, you can distinguish short-term (maturity is from 3 to 12 months); medium-term (from 1 to 5 years); long-term (more than 5 years); unlimited.
Bonds can be issued to bearer or registered.
Finally, by the nature of circulation, bonds are convertible (they provide the right to exchange them for other securities, for example, for shares) and non-convertible.
How is bond yield paid
The payment of the bond yield depends on its type. So, on bonds with a fixed interest rate, income is paid in the form of a designated percentage at a certain interval (for example, annually, quarterly). For example, you bought a bond with a par value of 1000 rubles. with an annual rate of 8% for a period of 5 years. Obviously, the annual income will be 80 rubles, and when the bond expires, you will receive 400 rubles.
Floating rate bonds are tied to specific financial performance. For example, to the refinancing rate. When this indicator changes, the bond yield also changes. For example, you bought a bond with a par value of 1000 rubles. for three years, the interest at which is equal to the refinancing rate + 1%. The refinancing rate changed as follows: 1 year - 6%, 2 years - 7%, 3 years - 8%. Thus, the yield on such a bond will be 70 + 80 + 90 = 240 rubles.
There are also mixed bonds, for which part of the income is paid at a fixed rate, the other 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 due to the discount (price difference). For example, an issuer issues a bond with a face value of 2000 rubles, and sells them for 1000 rubles. Thus, your yield on the sale of the bond will be 1000 rubles.
In 1992, government bonds of the winning loan were also issued in Russia. The yield on them was paid on the basis of draws of certain amounts, which were made at a certain frequency.
