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2016/08/31 12:16:24

Bonds

The bond — the debt security reflecting the loan relations between the investor (creditor) and the issuer (borrower). In other words, the bond is a debt. Issuing bonds, the company borrows money and undertakes to return them to the bondholder with percent over time. For the company bond issue is one of methods to attract money to the development.

Content

When bonds can be useful

Bonds have lower volatility in comparison with actions and are most often used as a conservative part of an investment portfolio. Coupon bonds give a stable cash flow. Some investors use bonds as a time haven of the money, expecting the profitable transactions on stocks.

Properties of the bond

Main properties of bonds:

  • Existence of a deadline of action of the bond. At bond issue the issuer specifies a repayment period — i.e. date when the company back redeems bonds from investors, paying them the nominal value of the bond. Most often bonds are issued for a period of several months about a year (short-term), from 1 to 5 years (medium-term), of 5 years and more (long-term).

  • Interest payment on bonds — the issuer's duty. Here cardinal difference of bonds from actions. If the company is not obliged to pay share dividends, and pays them according to the recommendation of Board of Directors, and the decision on payment is made by shareholder meeting, then interest payment on bonds is an obligation of the company. If the company does not pay interests in time, it is called a default. In that case bondholders can demand interest payment through court. The issuer determines the value and frequency of payments at bond issue. The amount of income is expressed percentage of the nominal value of the bond and shows annual profitability.

  • Risk of a default — risk that the issuer will not be able to fulfill the obligations for debts. Credit ratings on which it is possible to judge reliability of bonds are assigned to some bond issues. Usually, if the risk of a default is high, it is visible on bond yield to repayment — it is much higher than average market.

  • In case of liquidation of the enterprise bondholders have a priority on payment as first of all the company is calculated with all creditors whom bondholders are among. As a rule, liquidation happens in case of bankruptcy of the company. If for settlings with all creditors the company does not have enough money, then the property is on sale. Settlings with shareholders happen after repayment of all obligations and it can turn out so that to shareholders will get as a result of nothing.

  • Bondholders, being creditors of the company, do not participate in its management.

Basic concepts

The face value of the bond is the price at which the bond will be repaid (it is redeemed by the issuer from the investor) at the end of the term. The majority of ruble bonds is issued with the face value of 1000 rubles.

Repayment date — date when the bond is repaid. Also there is an offer — the issuer can sometimes determine date of the offer, it when he can redeem the bond from the investor before repayment date. The investor can sell the bond to the offer.

Depreciation — on the majority of bonds face value is paid at the end of circulation period — it is called repayment. But there are bonds with depreciation of face value — in this case face value is repaid on at once, and paid by installments on all circulation period of the bond.

Market price — in the market the price of the bond can differ from face value and to be more or less than the face value. The price of the bond is expressed percentage of face value, 100% — the price correspond to the face value of 1000 rubles, 101% — the price higher than face value for 1%, the price of 1010 rubles. In the market the price of the bond fluctuates depending on market conditions, interest rates, demand and supply. Usually the range of fluctuations is 95-105% of face value. But if there is a risk of nonpayment of the coupon, then the price can fall stronger. The repayment date is closer, the bond price is closer to face value.

The coupon is money which the issuer periodically pays on the bond. The rate of the coupon is expressed as a percentage annual and shows annual coupon yield of the bond to face value. For example, the face value of the bond is 1000 rubles, the coupon of 10%, payment two times a year. It means that the investor will gain income of 100 rubles two payments on 50 rubles.

Types of bonds

On an income acquisition method

Are divided by a method of income acquisition of the bond on:

  • coupon
  • non-coupon (discount)

According to the coupon bond the issuer pays money (coupon) at regular intervals. Payments for bonds can be performed once a year, once a half-year, quarterly is a coupon period. A coupon yield is charged every day, but paid only in a coupon payment date which is known in advance. Money arrives into your account usually in 2-3 days after a coupon payment date.

The amount of a coupon yield which collected for the coupon period, but is not paid yet, the saved-up coupon yield (SUCY) is called. After payment of the coupon of NKD it is nullified and begins to collect again.

If you buy the bond, then should pay to the seller of NKD which collected by day of the transaction, compensating by that to it the half-received income (as it loses the coupon at sale). If you sell the bond, then the buyer pays NKD to you.

For example, the value of the coupon is 40 rubles, the period of payment of the coupon — 182 days (time in half a year). Let's say from the moment of the last payment of the coupon there passed 3 months (90 days), in this case NKD is equal to 20 rubles.

The coupon on the bond can be fixed and variable. On the bond with the fixed coupon the amount of the coupon for the entire period of payments is permanent, on the bond with the variable coupon the amount can change.

The value of the variable coupon becomes attached to some benchmark interest rate, for example a rate of LIBOR (a rate in international market of interbank credits) or a refunding rate, and still some percent (allowance) is established as a base rate +. As the base rate can change over time, and the size of the coupon will change too. For example, the value of the coupon is calculated as a base rate + 2 percent points. In the first year the base rate is equal to 3%, the size of the coupon of 3+2=5%, in the second year of 3.5+2=5.5% means.

According to discount bonds the coupon is not paid, the investor gains income because the bond is on sale below nominal value (with discount). For example, the company sells the bond of 1000 rubles for 900. At the expense of a difference between the selling price and the redemption price the investor gains income.

By a providing method

Are divided by a method of providing the bond on:

  • secure (mortgages) — for reliability augmentation and attractiveness of the papers the company can issue secured bonds, payments for which are guaranteed by some assets. The real estate (mortgage notes), property, the credits, securities and other assets can act as providing. In case of bankruptcy these assets can be sold and go for repayment of obligations under bonds.

  • unsecured (bezzakladny) — unsecured bonds are not provided with any assets, and the guarantee of payments depends only on the general solvency of the company.

On the status of the issuer

Are divided by the status of the bond issuing institution on:

  • state — are issued the government, in Russia government bonds are called federal loan bonds (federal loan bond) and are issued the Ministry of Finance, in the USA it is treasury bonds or trezheris (treasuries)
  • municipal — are issued the local (regional) authorities, for example bonds of the Moscow region
  • corporate — are issued business companies, for example bonds of Sberbank

Eurobonds of Russia

State bonds of the USA (Treasurys)

Main article: State bonds of the USA (Treasurys)

Who and as allows the USA to live on credit decades.

As repayment

As the bond redemption share on:

ahead of schedule repayable — on such bonds at the issuer are an opportunity to extinguish them ahead of schedule before repayment date

  • revocable — the right of early repayment of the bond belongs to the issuer
  • returnable — the right ahead of schedule to show the bond belongs to the redemption to the investor
  • depreciable — the issuer during bond circulation period pays its face value gradually by installments to reduce the amount of payments at the time of repayment
  • irrevocable — bonds are repaid once in the determined date

On convertibility

Are divided by convertibility of the bond on:

  • converted — the investor has the right to exchange bonds for a certain number of shares or other bonds of the same issuer
  • inconvertible

On indexation of payments

Are divided by indexation of payments of the bond on:

  • indexed — the benefits amount is adjusted depending on changes of some indicator, for example the rate of inflation
  • not indexed

Revenue bonds

Separate group — revenue bonds. According to revenue bonds the company has the right to pay interest income only in the presence of profit. Revenue bonds share on:

  • simple — unpaid income the company is not obliged to compensate in the future
  • cumulative — unpaid income collects and the company will be obliged to pay it in the future

Released abroad

If the company issues bonds abroad, then they share on:

  • foreign bonds — are issued in the market of other country in currency of this country
  • eurobonds — are placed at the same time in the markets of several European countries and too in foreign currency at once

Profitability

2019: Negative yields on junk bonds in Europe

In July, 2019 in the market of junk bonds of Europe negative yields begin to be fixed.

So you have to nobody the necessary bond, and you pay money for the fact that you store to nobody the necessary bond.

According to Bank of America of Merrill Lynch, the global volume of securities with negative yield fluctuates around digit of $12.8 trillion.

Taxation of bonds

2017: Release from the PIT

The president Vladimir Putin in December, 2015 to Federal Assembly asked the government to present offers on market development of corporate bonds in the annual message and to exempt from taxation, including from the PIT, a coupon yield on bonds.

On March 22, 2017 the State Duma of the Russian Federation adopted the law on release of natural persons and legal persons from payment of the PIT from the coupon yield gained on the addressing ruble bonds of the Russian organizations if these bonds are issued in 2017-2020.

The law is adopted under the name "About Making Changes in Chapter 23 of Part Second of the Tax Code of the Russian Federation".

Coupon yield on such bonds assess the PIT only in case of exceeding of the amount of the coupon over amount of interest calculated proceeding from the nominal value of bonds and increased by 5% of the refunding rate of the Bank of Russia operating during the period for which income is paid.

Income in a type of discount gained at repayment of the bonds of the Russian organizations nominated in rubles and issued in 2017-2020, is also exempted from payment of the PIT without restrictions on the amount.

"Proposed measures will allow to provide alignment of conditions of taxation of interest income of individuals of investments into deposits in banks and in circulating bonds of the Russian organizations", - is mentioned in the explanatory note to the document.

The law becomes effective in 30 days after its official publication, but not earlier than the first of the next tax period according to the PIT.

Till 2017 the PIT of 13% was levied

Income of individuals on bonds is assessed with a tax of 13%. The tax is paid from a coupon yield and from income from sale of bonds. The tax on coupons is paid by the issuer, i.e. money comes to your account already "net". The tax on income from sale is held by your broker, charging money off your account at the beginning of a year or at an output you means.

Tax base at sale of bonds is calculated so:

(Income from sale + NKD gained) – (Expenses on purchase + NKD paid) + the Coupon yield

Tax base at the bond redemption:

Bond face value – (Expenses on purchase + NKD paid) + the Coupon yield

Conditional example: purchased the bond at the price of 99% — 990 rubles, NKD at the time of purchase of 5 rubles, the expense on purchase 990+5=995 means. Coupon of 40 rubles. After a while sold at the price of 99.5% — 995 rubles, NKD of 10 rubles, the sale revenue 995+10=1005 means. Income of 1005-995=10 rubles. Tax = 10 * 0.13=1.3 rubles. A tax on the coupon 40*0.13 = 5.2 rubles, i.e. into the account will arrive not 40 rubles, but 34.8 rubles. The tax on a coupon yield keeps at once at receipt of income into the account. The broker will hold a tax on income from transactions in the beginning of the next year or at withdrawal of funds from the account.

Tax base decreases by the amounts actually made and the documented costs connected with acquisition, storage, implementation and the securities redemption.

The following income of individuals on transactions with securities is not assessed with a tax:

  • coupon yield according to the government interest bearing bonds (federal loan bonds) for lease time the security the individual;
  • coupon yield according to interest bearing bonds of the subjects of the Russian Federation and local government authorities.

How to select and purchase bonds

Main article: How to select and purchase bonds

Sources of information on bonds

It is possible learn the face value, market price, a coupon rate, repayment date and other parameters of the bonds which are trading in the Russian market on the websites of the Moscow Exchange, Rusbonds.ru[1].

See Also

Notes