Bonds have been circulating in the world for more than 200 years - a long time to experiment with different issues of the oldest securities. The first bonds were issued by the state of England back in the 17th century - money was borrowed from the people for receipts, bonds to cover the budget deficit. That is, the same loan, but instead of a bank, people give money in return for interest and the subsequent repurchase of securities, but without long modern agreements. In addition to the classic types of bonds, which have passed the test of time and are considered the most reliable, in the modern rapidly changing world there are more and more new varieties of debt instruments. You just need to understand what a bond is - the forerunner of many modern financial instruments.
A bit of history
Following the example of England, the Soviet state issued bonds for decades, providing bonded additional income to the solution of many financial issues. In those historical times, the repurchase of government securities was forced. Moreover, the interest on payments regularly decreased, and the payment terms were delayed by 20-30 years.
In Russia, the history of bonded loans began in the 18th century with Catherine II, who carried out a successful foreign economic policy, achieved loans in the Netherlands and Italy for a protracted war with the Turks. As a result, the amount of external debt reached 200 million rubles, which means about 11 billion rubles for today's money.
During the Patriotic War of 1812, a new state loan was required in the form of short-term bonds, but due to the forced nature of the repayment of the state loan, bonds did not become a popular security of the time.
Until Soviet times, the state treasury lived in a long-term debt regime, issuing series of bonds, replacing old expired state treasury tickets with new ones. The history of the USSR remembers bonds in the form of winning loans, with the help of which it was possible to buy “scarce goods”. In the 1990s, issued government bonds no longer implied commodity security, being now a financial instrument in which organizations and any private person who knew what a bond could invest could.
Golden loan
The most famous state loan in the history of the USSR was the "golden loan" of 1982 bonds. Among the people, these bonds, issued in huge circulation in 1982, were called the "Brezhnev loan", and the exact number of bonds issued was not officially announced. Denominations of bonds of the "golden loan" were issued at 25, 50 and 100 rubles, with an annual income of 3%, which was considered very good money at that time. Bond ownership was not recorded anywhere, issued to bearer, considered almost the second currency in the country.
The bonds were drawn several times a year, and the bond whose number fell out during the circulation won. Then it was possible to get winning up to 10 thousand rubles.
When the Soviet Union collapsed, debt obligations to the citizens of the country fell on the Russian Federation. The fulfillment of financial obligations in the form of payment of debts and exchange for new bonds continued until the end of 1994. The owners of already new government debt receipts that exchanged 1982 bonds for 1992 bonds received funds on them until October 2004, then the payment term was extended until the end of 2005. Redeemed bonds, taking into account the 1998 denomination. It turned out that for bonds with a par value of 500, 1000 and 10 000 rubles, they paid 50 kopecks, 1 ruble and 10 rubles, respectively.
After all payment deadlines, many holders of bonds of the "golden loan" appealed to the courts to resolve the issue of receiving funds due for obligations. In the judicial bodies of our country, applicants received rejections everywhere. But at the European Court of Human Rights, several appeals were heard with final court decisions obliging the payment to be made. The most stubborn and patient received their money due on government debt obligations.
Who can issue bonds
In our country, bonds can be issued, except by the state, by any legal entity, for example, a joint-stock company or a limited liability company. Government bonds have the right to be placed both at the level of the Russian Federation - these are Federal Loan Bonds for individuals - OFZ, and at the level of constituent entities of the Federation, for example, bonds of the Saratov Region, Moscow Region, Moscow, and also at the municipal level - bonds of Novosibirsk, Tomsk.
In the "new history of bonds" until 2001, bonds were issued exclusively state - short-term, OFZ and bonds of the constituent entities of the Federation - Moscow, St. Petersburg, Orenburg region.
The first corporate issuers on the Russian securities market were Gazprom, later with the modern instrument Gazprombank Bonds Plus, and OAO NK Lukoil.
What is a bond?
“Bond” means “commitment” translated from English. What is a bond - this is a specific obligation of the debtor at the indicated time to return the amount of the debt and interest due on the debt. The issuer of the bond, the one who issued it, acts as a borrower, and the buyer of the bond is a creditor. Instead of the long word “bond,” financiers often use the slang word “bond,” which in meaning means the same thing.
The essence of the bond is that it is a security that provides its acquirer with a fixed term income in the form of a constant percentage of its face value with an agreed term of borrowed relations.
Par value of a bond is the price printed on the front side of the bond and paid on the day of redemption, that is, redemption of the bond.
A bond is a long-term debt instrument, an ordinary debt receipt between the investor who bought it, thereby lending money, and the issuing borrower who issued this bond.
The investor who bought the bonds will not be the owner of the issuer's business (as in the case of shares), he is only the creditor of the company that issued the bonds. And at the end of the agreed term for the placement of the bond, the issuing company commits itself to repay the borrowed funds along with interest for the possibility of using credit money. What is a bond? It is like a bank deposit when a client deposits money into an account, waits for a while, then receives his money with interest. But unlike deposits, bonds are not insured by the deposit insurance agency. The profit is almost the same both with the bond and with the deposit placement of funds.
Varieties of bonds in form
The classic form is a coupon bond - with a constant coupon, that is, a fixed percentage for payment. The issuing company pays bondholders income in the form of coupons - the same constant payments over the entire term of the bond. Upon redemption of the bond (redemption by the issuer back), investors receive a nominal amount and the last coupon.
Zero-coupon bond - coupons are not paid on it, but only the nominal value at the end of the loan term. The only source of profit when buying a zero-coupon bond is the difference between the purchase price and the face price written on paper.
Lately, bonds with a variable coupon have become very popular, when the size of the coupon is not known in advance, it is not fixed, because all the time it changes with the cost of the bond itself, depending on the situation in the country and on the global financial markets.
Eurobonds are debt securities issued on the European stock market by companies operating outside the European Union. Operations with Eurobonds of Russian issuers are unavailable to an ordinary private investor due to difficulties with transferring capital abroad and a high “entry barrier” to this market. It is possible to make transactions with Eurobonds with a capital of at least 250,000 US dollars.
The difference in form gives some advantages to the issuer. Payment of income, redemption of bonds and other operations are carried out at lower costs for the borrower.
Bonds by duration of circulation
- Short-term - placement of bonds for a period of 1 year to 3 years.
- Medium-term - for a period of 3 to 7 years.
- Long-term - placed for a maximum circulation period of 7 to 30 years. They are characterized by greater price volatility with changing market conditions, that is, they are more risky.
- Unlimited - from 30 years or more without a fixed maturity date.
Trash Bonds
Bonds with a high risk of default by the issuer are often referred to as “junk” or “junk” bonds. The expression came to us from the American market - junk bonds. Junk bonds have a very high yield, but, most likely, working with such bonds is the lot of professionals who can assess the issuer's credit risk.
Bonds by issuer status
Corporate - produced by large enterprises, usually for a long time
Government bonds of Russia are issued in the form of registered uncertified securities by the government of the country.
Municipal - bonds of regional executive authorities.
International - issued outside the state, for example, Eurobonds issued in foreign currency.
Bonds by type of loan collateral
Mortgage bonds - secured by a share of property as collateral for reliability as an issuer and attracting more investors. Property collateral can serve as premises, vehicles, equipment. If the issuer does not fulfill its obligations on bonds, investors have the right to demand the sale of the mortgaged property to return the invested funds.
Unsecured bonds - debt receipts without providing any collateral. The reliability of unsecured bonds depends only on the financial position of the company that issued the bonds, its stability and time-tested status. Well-known large holdings issue only unsecured bonds, because their name is already a guarantee of fulfilling debt obligations to investors.
Differences between stocks and bonds
These are securities, financial market instruments in which anyone can invest. The following are significant differences between bond issues and stock market securities.
- Bonds can be issued by any commercial enterprises, as well as by the state, but only joint-stock companies have the right to issue shares.
- The purchase of a bond forms the investor’s attitude as a creditor of the issuing company, and the purchase of shares forms the investor as the owner-shareholder of the share of the issuing enterprise, which gives him the right to participate in partial management.
- The owner of the bond will not receive less than the initial value upon maturity, unlike stocks, which can become significantly cheaper.
- The interest on a coupon bond is predominantly fixed, and dividends on ordinary shares change significantly, being the result of the business activity of the issuing company, and may not be paid at all.
- Coupon interest on bonds is paid to the investor only during a strictly agreed period under the terms of the loan, while shares generate income all the time.
- The yield on bonds, as well as on the bond fund, is always lower than on shares, but its guarantee is much higher than on shares.
- Coupon interest on bonds is a priority for payments to shares. In case of unsatisfactory results of the enterprise’s activity, a decision will be made not to pay dividends on shares, but the issue of non-payment of coupon interest on bonds is never raised.
- In case of bankruptcy of the issuing company, debts on bond payments and other debts are paid first and only in the last turn - on shares. Shareholders in such cases run the risk of not getting their money at all.
Taxation
In March 2017, following a proposal made earlier by President V.V. Putin to exempt from taxation of the Russian corporate bond market, including personal income tax, the coupon yield on bonds, the State Duma of the Russian Federation, having considered the proposal, adopted the relevant law “On Amending Chapter 23 of the Part Second Tax Code of the Russian Federation ”for bonds issued in 2017-2020.
Prior to the adoption of the above law, the income of individuals on the sale of bonds was taxed 13% on coupon income and on the sale of bonds. From the coupon, the tax was paid by the issuer, which issued the papers, and money came to the account already "white". The tax on the sale of bonds was withheld by the broker at the beginning of the year or when the bond holder withdrew money from the brokerage account.
2018 Federal Loan Bonds
OFZ 2018 are characterized by an attractive interest rate for the first coupon - 7.5% per annum, which increases every subsequent six months, amounting to 10.5% upon maturity after three years. It is government bonds that meet all the requirements of reliability and profitability that ordinary investors are waiting for from investing their funds. Bonds for individuals in 2018 have guaranteed high yield with the possibility of early sale and the simplicity of the procedures for buying and paying off bonds.