Corporate bonds are bonds issued by private and public companies. The main purpose of the issue is to attract money on more favorable terms than the bank offers. For an investor, corporate bonds can be a profitable investment.
What are corporate bonds
Corporate bonds are debt securities issued (printed) by enterprises to raise money. Any more or less large company may engage in the issue of such securities. Mostly they are printed on paper, in recent years there has been an opportunity to purchase them in paperless form on the Internet. Such bonds are registered, you can only buy them using electronic signature. To do this, you need to register on the official website of the bank or broker. Investors make all transactions through a special electronic terminal or from the user's personal account. In any case, a person goes through an identification.
Corporate bonds of companies, especially private ones, are considered the most risky, although much depends on the reliability of the issuing company. Large well-known companies are not interested in not paying debts to their investors. A delay or refusal to pay a debt actually means that the company is bankrupt, and this, in turn, leads to a drop in the price of its shares.
Where to get
Corporate securities, bonds and stocks can be purchased both on the stock exchange, in Russia (this is the Moscow stock exchange), and on the over-the-counter market (there are several dozens and even hundreds of well-known and little-known platforms for this). Mostly transactions with corporate bonds and other securities occur using modern means of communication: telephones, computers with Internet access.
You can also buy securities at bank branches. When buying, it should be borne in mind that corporate bonds must have a documentary form, even if the document has a paperless form. The buyer must receive a file (message) confirming his right to own a security and the right to demand interest on it.
Benefits of investing in corporate bonds
At first glance, it might seem that investing in corporate bonds is a disadvantageous and ungrateful business. The risk is high, the probability of repayment of debt by the company is low. In fact this is not true. Large companies and enterprises with a good reputation and large volumes of current and non-current assets are not interested in deceiving buyers of their bonds. Moreover, it is more profitable for them to issue bonds for two reasons.
Firstly, they receive highly liquid assets (money) at a price much lower than if they took a loan from a bank. The average corporate bond rate is 8-12%.
Secondly, during the period for which debt securities are issued, they pay only interest. They pay the principal amount only at the end of the term.
How to investor choose reliable corporate bonds
The main task of any investor is to invest with the least risk of loss and with the greatest benefit. Corporate bonds of companies - this is one of the few financial instruments that provides such an opportunity. Many large and medium-sized companies issue bonds, so the investor has a wide choice. In order to secure their investments, when purchasing corporate securities, the investor should adhere to the following rules.
- Acquire bonds of the most famous companies.
- If the rate of return on securities is higher than the rate on loans at the bank, then you should not buy such corporate shares and bonds. This means that for some reason the bank does not give credit to the company, and it is forced to seek funds in this way. With a high probability such an enterprise is on the verge of bankruptcy.
- Never buy securities on unfamiliar OTC markets or from dubious brokers.
An important condition for choosing an object for investment in the corporate bond market is the stable financial condition of the issuing company. The absence of publications of financial statements, as well as documents proving its reliability (audit report) should alert the investor. Unfortunately, if the money is not invested in the wrong company, but in a one-day company, no one will return it.
Types of Corporate Bonds
By the method of generating income corporate bonds are no different from ordinary treasury securities. Income is calculated either by coupon or by discount. In this, government and corporate bonds are similar.
For coupon corporate bonds, income is paid in the form of interest, plus the amount indicated on the coupon. For example, the par value of a coupon bond is 1000 rubles, the rate on it is 8% per annum, and plus the owner of the security can count on coupon income in the amount of 50 rubles after one year. The term for which the security is issued is 2 years. This means that at the end of the first year he can take 50 rubles, and in two years another 1166.4 rubles. As a result, the yield on the security will amount to 216.4 rubles.
The discount is also charged in the form of interest. But the bonds themselves at initial placement are sold at a price below face value. For example, the nominal price is 1000 rubles, and the company sells them at a price of 900 rubles. Plus 6% per annum. The security is issued for 1 year. The price when traded on the exchange can be either higher or lower than the price at which the securities were sold by the issuing company. This is true for both discount and coupon bonds.
What is the difference between corporate bonds and stocks
It is best to determine what corporate bonds are by comparing them with other types of securities. For example, with stocks of companies. A stock is an equity security. It gives its owner the right to vote in management, the right to receive a certain share of the profit - dividend, the right to part of the property in case of bankruptcy of the enterprise. The shares are issued by the issuing company, they can be sold both on the exchange and in the OTC market.
Corporate securities: stocks, bonds are issued by the issuing company. Both those and others can circulate both on the exchange and on the over-the-counter market. The main difference between bonds and stocks is that they do not give their owner any rights to manage or part of the income or property.
All that a buyer of corporate bonds can count on is that he will receive his money with interest back after a certain time. Moreover, he will receive interest either earlier or at the time of closing the transaction. That is, at the time of the sale of the bond to the issuing company. An investor may demand reimbursement in the form of part of the property from the company only if, under the agreement, the bond he acquired is secured by this property.
Corporate and treasury bonds. Difference
Another type of bond is government treasury bond. They are issued by the state, and it is responsible for their repayment. They are considered as reliable as bank deposits, but their rates are 2-5% higher. The state can not pay for them only in one case - in the event of default. However, this does not mean that it will not try to cover the debt with devalued money. And this is a risk. Therefore, when buying government bonds, it is so important that the inflation rate is low. And the economy of the issuing country is stable.
One of the options for bonds are Eurobonds. This is a security whose nominal value is expressed in any foreign currency (dollars, euros, pounds). Corporate bonds have two main differences with respect to government bonds. First, an enterprise may not pay off its debts on bonds if it is in a state of bankruptcy and its assets are not enough to pay off all debts. In this case, the owner of corporate bonds is left with nothing.
The second difference. Availability of corporate bond levels. Levels is a rating system for bonds according to the level of reliability and risk. In Russia, there is a rating system for securities, including corporate bonds. However, such a system does not fully guarantee that the company will not go bankrupt in a few years, but such a system is better than nothing at all. There are nine levels in total: A1, A2, A3, B1, B2, B3, C1, C2, C3. Corporate bonds of well-known Russian companies have the highest rating. The lowest are those companies whose financial condition is in an unstable position. But even low-rated securities are better than those that do not pass the ranking system.
It is much more risky to acquire corporate bonds of those enterprises whose securities are off-rating and off-exchange. The rating adds stocks and bonds of companies that publish their financial statements. The reasons for the downgrade of such enterprises may be both temporary difficulties and serious problems. When buying corporate bonds outside the rating and off the exchange, the investor risks acquiring the securities of a nonexistent enterprise.
Features of the corporate securities market in Russia
The stock exchange and the OTC market in Russia have their own characteristics that make them unlike other trading floors. This is due to the fact that exchange trading in Russia is practically undeveloped. And there are few companies issuing shares and bonds for free circulation. Mostly on the stock exchange and over-the-counter markets are traded shares of mining companies.
Unfortunately, there is still a strong dependence of the domestic economy on the prices of metals, oil and gas, which are the main export goods. This leads not only to an unstable exchange rate (ruble is in fever), but also to the country's economy as a whole. Although commodity prices have been steadily declining recently, companies engaged in mining operations are still considered the most reliable and attractive investment targets, including foreign ones.
Investors, both Russian and foreign, prefer to buy corporate blue-chip bonds, which are represented on the Moscow Exchange by oil companies. However, even the fact that the company belongs to the “blue chips” does not guarantee that the company will not go bankrupt. Unlike treasury bonds, corporate bonds are not provided with state support. And in case of bankruptcy of the issuing company, the investor will not receive anything.
Although foreign investors are attracted by high bond rates, they are afraid to invest their money in Russian enterprises. The risks for Russian corporate bonds are very high, taking into account not only the unstable state of the economy, but also the imperfection of the legislation. Underdeveloped laws provide an opportunity for some companies, which by definition will not be able to pay off investors, issue and place bonds on the OTC market.
Selection tips
However, not everything is so bad. Investors can use the instability of the Russian economy to their advantage, provided that they adhere to certain rules.
- Acquire only government and corporate bonds only on the stock exchange through officially operating brokers and banks.
- It is preferable to purchase bonds of state enterprises, since they have a level of reliability almost the same as treasury bonds, but the yield on them is higher.
- Buy only Eurobonds with a denomination denominated in stable currency: dollar, euro, Swiss franc or pound.
- Before buying, analyze financial statements of the issuing company, compare reports of different companies with each other.
- Get familiar with corporate bond ratings. Blue chip companies are the most reliable companies in Russia. And although they depend on commodity prices, so far they are the most successful and are developing steadily.
When concluding a transaction, it is necessary to take into account not only the cost of the bond, its type and level of profitability, but also possible commission costs.
Corporate bonds are another investment tool that makes it possible to use capital to generate income. In the Russian economy, the most reliable type of bonds are Eurobonds. Despite the fact that the yield on them is 1-3%, taking into account the falling ruble, such an investment will be the most profitable.
Important!
When buying corporate bonds, you should remember that these are risky securities, and a lot depends on the financial condition of the company that issued them. Therefore, you need to pay attention not only to what is the yield or currency of the face value. The important thing is the financial condition of the issuing company, the state of the economy of the country in which the company is located. Are there any prospects for the development of the company, or is it facing bankruptcy. The safety of invested funds depends on this.