One of the main functions of any security is to provide profit to its holder, which fully applies to bonds. Depending on how the owner of the bond receives income, the bond may be coupon or discount. The bond appeared on the securities market, like paper, to which the coupon was attached, where the percentage of yield and the date it was received was indicated. After that, on a certain day, the owner received money on the bond, and the coupon was redeemed.
So, a discount bond is a security with a zero coupon, because it does not set the rate of return. The owner of such a security buys it at a price below par and receives income from a discount, that is, from the difference. The Russian stock market very often uses this type of bond. A typical example of a discount bond is a government short-term coupon-free bond, which is sold at auction at a price different from the face value down.
Typically, when issuing a bond, the issuer sets a certain nominal value of the security and the rate of return in percent. A coupon bond usually has a fixed interest rate, which is indicated on the bond itself. Throughout the entire period of its circulation, a constant income is paid on it. It is worth noting that it is possible to establish such a constant interest rate only in case of a stable economic situation in the country, when rates and prices hardly change. Otherwise, a fixed interest rate entails great risks for the issuer. If interest rates are reduced, he will have to pay income at the rate that is fixed at the issue.
Naturally, issuers found a logical way out of this situation. They began to issue bonds with a floating interest rate. Such bonds became widespread in America in the 80s, when there was a tendency to establish high interest rates and their frequent changes. It was beneficial for companies to issue bonds with a floating interest rate, which was tied to a certain indicator, which, in turn, reflected the situation on the financial market in real light. Most often, such an indicator was the yield on three-month treasury bills. When the bond was launched, one interest rate was set, then after three months this rate was adjusted depending on the yield on bills. Most often, the interest rate on a bond consists of two components: the interest rate on a treasury bill plus a risk premium of 0.5%.
If we consider the situation on the Russian securities market , then a typical example of a variable-rate bond can be called federal loan bonds, which have a variable coupon, or government savings loan bonds. The profitability of the latter directly depended on the profitability of T-bills. Payments on coupon bonds are periodic, depending on the conditions established when the bond was issued, income on it can be received once a quarter, six months or a year.
Sometimes a bond can be issued with a coupon on which fixed interest is written, plus a security is sold at a discount. Then the owner receives the income from such a security “doubly”: he has regular coupon payments, and receives additional income upon repayment .
In conclusion, I would like to mention such a security as a profitable bond. We will try to give her a definition. A bond of this type generates income only if the firm has a profit. No income, no profit. A yield bond can be simple or cumulative. On a simple bond over the past years of “downtime” income is not paid, even if in the subsequent period of time the company receives high profits. But on cumulative bonds, income is accumulated and paid as far as possible. The accumulation period is usually limited to three years. Naturally, when a company is liquidated, cumulative bonds are much higher than ordinary stocks and ordinary bonds.