The document that represents the security confirming the issuer's debt to the investor is a bond. In other words, a private investor lends money to the issuer, that is, to the one who issued the bond. This type of document is freely sold and bought on the market. This article will discuss bonds, their nature, classification and bond markets.
Definition
A bond is an equity debt security that captures the borrowed relationship between creditors and the issuer. The issuer pays interest as a percentage to the investor, and then returns borrowed money to him at a certain time. In fact, a bond can be called a financial instrument with which debt is drawn up.
Characterization and classification of bonds
Private debt securities are those bonds that were issued by legal entities. They generate income as a fixed interest rate to value. There are also bonds that have a floating rate. It changes, as a rule, according to a certain algorithm.
Interest payments on bonds in a specific period occur on special coupons, which are coupons on which the rate figure is printed. The coupon is withdrawn from the attached card. Payment of interest is carried out with a certain periodicity, which is determined by the conditions of the loan itself. Payments can be annual, semi-annual or quarterly. The bond is the more profitable, the more often the accrual of income occurs, this leads to an increase in its market price.
Bond Issue Options
The following main parameters of the bond issue are distinguished:
- Maturity dates of bonds.
- Amount of bond issue.
- The amount of income that is paid on the bond.
- Par value of bonds.
Maturity dates of bonds
As a rule, all bonds are issued with a specific maturity. The following classification of bonds by maturity is distinguished:
- Long-term bonds. Their circulation period exceeds 10 years.
- Mid-term bonds. Their circulation period is approximately 5-10 years.
- Short-term bonds. Their average circulation period is up to 1 year or from 1 to 5 years.
Bond properties
Consider the classification of bonds, their types and types, as well as properties. The symptoms include the following:
- The presence of bonds size and frequency of payments.
- Defined validity period.
- The priority of income from the bondholder.
- The priority right of the owner of a bond to satisfy his material requirements when closing the enterprise.
Bonds are usually bought by investors who have a conservative investment strategy. They strive to reliably save their capital, and not to make big profits. At the same time, the investor hopes that he will receive regular and constant income in the form of interest. When the bonds expire, he expects to take back his capital.
When issuing bonds, any issuer considers the possibility of their sale. This is feasible using the exchange through listing. In this case, the issuer has the opportunity to add his bonds to the list of instruments on the exchange for trading. In addition, he can sell his bonds in the OTC market. Typically, the yield on bonds is greater than the rates on deposits with banks and less than the rates on loans.
Types of bonds by income payment methods
There are the following types (classification) of bonds by methods of paying income:
- Bonds with a fixed coupon rate - coupon.When they are issued, coupons are attached to them, which are cut-out coupons with the date of payment of income marked on them and the interest rate. In order to receive income, the holder must present a bond with coupons. In this case, the owner is given his income, and the coupon is redeemed.
- Bonds with a variable rate (interest depends on the loan interest).
- Bonds with a uniformly growing rate.
- Bonds with a zero coupon - discount. Interest is not paid on them, and their owner has income from the sale of bonds at a discount. The issuing rate is introduced below the nominal, while the investor’s income is the difference between the nominal price and the purchase price. On the stock market in Russia, discount bonds are ubiquitous.
- Bonds with selective payment (if the investor wishes, the coupon income can be replaced with new bonds).
- Mixed bonds. First, income is paid at a fixed rate, and then at a floating rate. The holder receives income upon redemption of bonds at face value, as well as constant income in the form of coupon payments.
Collateral classification of bonds
Bonds are also divided according to the collateral method:
- Bonds in the form of subsequent collateral receipts (municipal, bonds of public funds).
- Bonds with collateral in the form of property (for example, gold-currency assets provide gold bonds).
- Bonds with specific guarantee obligations.
- Bonds whose pledge represents proceeds from subsequent activities on the holding.
- Bonds that are not secured by collateral (they are issued because the company does not have the required amount of financial assets or due to the high reputation of the company, which makes it possible to borrow money, without resorting to securing property bonds with its assets).
In addition, the bond is divided into convertible and ordinary by type of circulation. Convertible bonds can be exchanged for shares of the same issuer on specific terms.
Ordinary bonds are issued without the possibility of their conversion into other securities or shares. As a rule, the holder of such a bond uses it until maturity. At the same time, he receives a certain income, which is provided for by special conditions for the issue of bonds. Also, the owner has the opportunity to sell the bonds at the market price before its maturity. The price will depend on the accumulated income from the coupon, rate, and other factors.
Convertible bonds
Bonds that give the holder the right to exchange for ordinary shares of the same issuer at a fixed price on a specific date are called convertible bonds. They are issued by the company for the accelerated implementation of bond issues. An investor who bought bonds in the secondary stock market or during the initial offering has the right to convert. For its implementation, the market value of shares, conversion price, income from investments in such bonds must be taken into account.
The total return on shares, as a rule, depends on the growth of the value of the rate and the size of the dividend. It exceeds the profitability of bonds, so the main subject of investment is stocks. However, the profitability of bonds has a significantly lower susceptibility to changes in market conditions. For this reason, with the instability of the situation in the economy, the priority in the selection of tangible assets as investment items may be different.
In commercial banks, bonds can become the main object of investment, since such institutions think about the reliability of their deposits, and not just about profitability. Private commercial agencies, which are common in economically developed countries, are systematizing corporate bonds in terms of their security.
Corporate
Next, we consider the classification of corporate bonds. By the method of providing bonds with material assets of the company, they can be divided into mortgage-free and mortgage-backed.
Mortgage bonds are bonds that are held by company securities or physical assets. The company usually issues one mortgage for all mortgaged tangible property. This mortgage is usually stored in a trust company. The entire amount of the mortgaged property is divided by the trust company into a specific number of bonds that are purchased by legal entities and individuals.
The trust company is the guarantor of the interests of investors. In addition, this company is a trustee of all those creditors who bought bonds. The responsibilities of the trust company include monitoring the direction of the company, its financial situation, the state of working capital and capital. It should also protect the interests of all investors by taking the necessary measures and ensuring the fulfillment of the borrower's obligations to creditors. The company that issues the mortgage, as a rule, pays for all services of the trust company.
The relationship between the trust company and the firm is regulated by a contract, which indicates all the conditions of the loan. If the company violates the terms of the contract, the trust company must require it to comply with these requirements. If the conditions are not met, the trust company may call for the repurchase of all issued bonds.
Mortgage bonds are as follows:
- General Mortgages.
- First Mortgages.
- Secured by securities.
- Lawless.
The issue of initial bonds is carried out under the first property collateral of the company. As a rule, the mortgage details the description of the property that is pledged, after which it is evaluated. Usually, a real estate appraiser is invited to determine the value of the property that is pledged. His conclusion is the main tool for determining the value of the collateral.
The issue of general mortgage bonds is secured by a secondary pledge of tangible property. The same assets may serve as collateral for bond issues. Claims on such bonds are satisfied, as a rule, after all settlements with holders of initial mortgage bonds.
With the help of securities of various companies, bonds are secured against securities. These companies should not be owned by the issuing company. If the debt is not paid, these securities are transferred to the owners of specific bonds.
Bondless bonds
Bonds that are not taxed are called bondless. They represent direct debt obligations of the company, not secured by any collateral. Satisfaction of the requirements of the holders of such bonds occurs along with the conditions of other creditors in a general manner. The general solvency of the company serves in fact as collateralless bonds.