The stock market has recently experienced increased demand among ordinary people. If earlier investments were available only to large corporations and wealthy investors, now anyone can purchase them. The attractiveness of coupon bonds lies in the fact that they offer higher returns on them than on bank deposits. Moreover, the above financial instrument is considered quite reliable.
However, for most ordinary people, the topic of bonds, in particular the stock market, as a whole seems so complicated that they do not even try to figure it out. I must say in vain. The profit that securities can bring pays off the time spent on studying the topic.
Features
A coupon bond is one of the popular ways to invest free cash. Especially if you choose liquid securities that are freely traded in the stock market.
What is a coupon bond? In fact, this is a debt security, according to which the owner makes a profit not only by purchasing below the nominal value, but also by accruing interest income.
Profit
The frequency and amount of coupon payments is determined by the company that issued the bond. However, this is not classified information. They are available to potential investors even before the transaction and allow you to decide on the advisability of acquiring coupon bonds.
Standard conditions for the circulation of securities allow you to return the nominal value at the end of the repayment period. However, coupon payments on bonds can bring an investor more income. Periodic payments occur twice a year or quarterly.
It is also possible that the coupon yield of a bond is paid at maturity. It is difficult to say how convenient this is for an investor.
Alternative
There are also couponless bonds. By analogy with the previous definition, it is easy to guess that they assume the absence of periodic payments. You might be surprised to wonder if it is profitable for an investor to purchase such securities. The fact of their presence in the stock market gives an affirmative answer.
Zero-coupon bonds are also called discount bonds. Another alternative name is “with zero coupon”. When studying investment topics, be prepared to hear both terms.
So, in what way do holders of couponless bonds earn money? Everything is simple. This type of securities is cheaper on the stock exchange than a coupon bond. That is, the potential owner acquires them cheaper than the face value, and after waiting for the repayment period to end, he receives the full amount. The difference between the two indicators is the investor's profit.
Kinds
All coupon bonds are divided into several types. Percentage in this case becomes the determining criterion.
- Constant. It assumes a single coupon rate, which is known to potential investors before the transaction is concluded, and this indicator does not change throughout the entire period of bond ownership.
- Fixed. By analogy with the previous option, the percentage is considered constant until the coupon bond is sold. However, in the future, the initial rate may be changed. Having a unique schedule allows the security owner to calculate the potential income.
- Variable. This percentage is set for a predetermined period after which the rate changes.At the same time, on the date of change of conditions, the investor can repay the bond, returning the nominal value in case he does not agree with the new conditions.
- Floating, or indexed. In this case, the interest on coupon bonds is tied to some economic indicator. For example, the key rate of the Central Bank. Accordingly, when this indicator changes, the profitability of securities fluctuates, which investors can count on.
If you need to determine the coupon rate of a bond, find out what type of paper you are interested in.
Which bonds to choose?
It is not worthwhile to unequivocally conclude which securities are profitable and which are not. Each type of bond has strengths and weaknesses.
For example, a constant, as well as a fixed percentage becomes a kind of guarantee for higher income. The same cannot be said for variable rates. It forces the investor to constantly monitor the situation in the stock market in order to make timely decisions on the feasibility of new conditions.
That is why, even before purchasing bonds, a potential investor is advised to carefully study the available information.
Careful calculation
As for the choice between coupon and non-coupon bonds, here, too, is not so simple as it might seem. If a potential investor seeks to obtain passive income, securities with periodic payments will be preferable for him. But with regard to total yield, coupon bonds are not always the most profitable investment.
Here, the potential investor can not do without careful calculations. You need to pay attention to the difference between the face value and the price at which the bond is put up for sale. The higher this indicator, the greater the investor will be able to receive further income. However, you need to understand that in order to get a nominal value, you should wait until the repayment period expires and understand that by that time the profit will be less due to inflation.