Bonds resemble a bank deposit. Their essence is the same and consists in lending in one case to a banking organization, and in another to an issuer, in which the state can act along with the subjects of the Federation and commercial companies. True, bonds have more options in the selection. Before choosing bonds for investment, it is necessary to study the following parameters: price that will change, coupon yield, maturity with offers, and so on. The yield of bonds directly depends on these characteristics. We learn about all the intricacies of how to choose bonds by studying the article to the end.
Difficult choice
Today, experts recommend for purchase:
- Bonds of large financial organizations from the top 30 (with the exception of state and institutions with foreign participation). For example, Promsvyazbank, Otkrytie and MKB are suitable.
- Subfederal bonds (in this case, personal income tax is not collected from the coupon).
- Eurobonds with a maturity period of two to three years and an investment amount of more than two hundred thousand dollars. Sberbank, VEB and VTB have a Eurobond yield in foreign currency ranging from three to six percent or more, even taking into account personal income tax. This is much more than banks offer on foreign currency deposits, however, the entry threshold is from one thousand dollars to ten.
How to choose bonds for investment, it is important to find out in advance. Regarding industry companies, experts recommend that you bypass the economic sector, such as the banking sector, air transportation and construction. With the exception of backbone organizations, which the state helps to stay afloat. State banks (Sberbank, VTB), along with large private financial organizations (Alfa Bank), and also Aeroflot, are usually ranked among the lucky ones.
Recommendations for 2019, how to choose bonds to buy, the reverse is to buy what is more affected by Western sanctions, namely construction companies.
Bond characteristics
Answering the question of how to choose bonds, it is worthwhile to analyze in more detail the main characteristics of these securities:
- Nominal price (for example, one thousand rubles or dollars). It is the redemption value and is usually set by the issuer.
- Market value is usually formed on the exchange as a result of bargaining.
- The circulation term is seven years. It is a question of the period after which the issuer undertakes to redeem its securities back at their nominal price.
- Bonds are characterized by coupon yield, that is, the size of the regular payment to the owner of the paper.
- Another distinguishing feature is earnings to maturity (for example, seven percent). This implies the total amount of all profits, which shows how much money will be received in the end.
It turns out by purchasing the bond and holding it in his portfolio until redemption (the reverse procedure for redemption by the issuer), the client has the right to rely on annual seven-percent profit. This also includes coupon payments.
What indicators should investors be guided by?
How to choose bonds may seem a rather complicated question at first glance, but it is much easier than choosing certain stocks. The client will not have to study the company’s reports for hours along with the prospects of the economic sector or current trends in the legislation. For him, as a bondholder, only one thing is important, namely, a financial organization should be solvent. True, there are a number of criteria that it would be nice to understand before choosing the right bonds to buy:
- One of them is the market sector (we are talking about Eurobonds, corporate, municipal, state).
- Type of coupon (fixed, indexed, discounts are meant).
- The industry of issuers (banks, construction, transport, along with light industry, oil and gas).
- The time period for circulation.
- The issuer has a rating.
What are the main risks of the holder? They consist in the fact that the issuer may unexpectedly declare bankruptcy and will not be able to redeem his debt at the stage of repayment of the bond. Moreover, from such an unpleasant situation, even large companies are not immune, which have been working in the market for years.
Corporate bonds
How to choose corporate bonds and what you should pay attention to, we will analyze below. This is a financial instrument through which a private enterprise can raise additional funds in its business activities. The issuer issuing these securities retains absolutely complete control without restructuring ownership of the company. Corporate bonds enable entrepreneurs to make a profit through a lower rate compared to bank interest. The objectives of issuing short-term loans is to raise funds in order to increase the volume of cash circulation opportunities.
The attractiveness of corporate bonds for issuers
Compared to the issue, the issue of corporate bonds allows owners, without changing the structure of the enterprise, to create an entrance to the capital market. In addition, it is necessary to take into account the fact that Russian organizations are an undervalued stock market, and therefore, the additional issue and release of shares for free circulation at a low price will significantly dilute the share of existing shareholders. So what to choose: stocks or bonds? Next, let's talk about the intricacies of such papers.
Corporate bond features
Many are interested in corporate bonds. How to choose the right bonds of a private company, because they are not only debt securities, but also stock, issue, stock, market, casual, or derivatives instruments? Investment value has the following parameters:
- She, as a rule, expresses borrowed or debt relations between the owner and issuer of the security.
- This is an independent facility that has its own course, and it is freely traded in the market.
- The bond has parameters in the form of profitability, liquidity, reliability and other investment qualities.
Corporate bonds have a nominal (nominal) value and a market price. The first is the amount that the issuer takes from the borrower and must repay at the end of the bond circulation term. The face value is the basic value in calculating the yield that a security must bring. True, in circulation, from issue to maturity, the bond is sold and bought at a price set by the market. This price may be less than the face value, and also higher or similar to it.
Corporate bond as a financial instrument
Choosing bonds is usually difficult. Especially when it comes to corporate bonds. When choosing, it is worth paying attention that long-term and short-term corporate bonds are fundamentally different from each other. The first are couponless bonds. Revenues from them are discounts. As a rule, they are traded less than the nominal price, but the closer the maturity date of the securities, the higher its total value. Long-term bonds provide the owner with not only a nominal return, but also a coupon (i.e. periodic) interest. Important are the goals of the release, which may be as follows:
- The current shareholder retains control of the enterprise.
- The procedure for raising funds ensures the fulfillment of upcoming or current tasks.
- Financing of promising projects of the issuer.
- The process of refinancing debts held by the issuer.
- Financing of an additional project not related to the main type of activity.
What are OFZs?
It is necessary to talk about what OFZ is and how to choose OFZ bonds. They are bonds issued by the Ministry of Finance of our country. They arose recently, but managed to arouse some interest among analysts, and also, owners of individual investment accounts, including among brokers. OFZs are classified as coupon-type securities, that is, they allow you to receive the payment of a certain percentage directly from the nominal value.
Types of OFZ
So that the client can decide how to choose OFZ bonds for purchase, it is worth listing their main types:
- OFZ with PD. Such bonds are distinguished by constant coupon income. This is perhaps the most common type of government securities. Their yield, as a rule, consists of the following two components: the difference in price at the date of purchase and repayment, the amount of the coupon payment. This is the best option against the background of an unstable state of the economy.
- OFZs with PCs are bonds with a variable coupon. The sizes of the coupon payment on them vary and are calculated on the basis of different indicators, for example, the inflation rate. They are a more risky option compared to conservative OFZs with PD. Investing in them is recommended when a person is confident in the growth of the economy and its basic rates.
Who is IIS suitable for?
Investing in the open spaces of the securities market is always a risky activity. The client may lose all of its funds due to an unfortunate set of circumstances prevailing in the financial market. A deposit in a financial organization will surely bring a person known interest, albeit small. An individual investment account (IIA) is a way of investing, and no one can guarantee its profitability, as well as safety,.
Before choosing bonds for IMS, it is worth paying attention that investments in IMS in a deposit insurance agency are not insured, that is, the state does not guarantee a refund if the personal broker or manager loses the license. Money is not insured at IIS, but if they invest in securities, then even after the bankruptcy of a broker or a management company, a person remains the owner of these securities.
What are the advantages of IMS?
IIS is a securities account. Its main advantage is the encouragement from the state in the form of the opportunity to receive a deduction, which allows you to pay a much smaller amount of tax or to return the percentage already paid.
IIS Features
Distinctive features are the following characteristics:
- Customer may receive a tax deduction.
- Contributions can be made only in rubles.
- The maximum contribution is one million rubles per year.
- In order for the tax deduction to work, the account must be open for three years.
You can choose one of the following two types: deduction for a contribution or directly from taxable income. In order to receive any of the deductions, it is necessary to open the IIS and not to close it for at least three years. Within a period of twelve months, a certain amount should be paid to the IIS (but as already mentioned above, no more than a million rubles).
After the end of the tax period, a person can receive a tax deduction in the amount of thirteen percent of the amount that was paid for the year, but not more than fifty-two thousand. It is worth noting that the maximum amount for calculating the tax deduction is four hundred thousand rubles.
What determines the profitability of bonds?
First of all, on the type of this paper. For example, the profitability of federal loan bonds is strictly tied to the key rates of the Central Bank. It is most profitable to buy OFZ during a temporary increase in rates. The reliability of the issuer is also of great importance, that is, the higher the risks of bankruptcy of the company, the greater the profit offered.
We examined how to choose bonds for investment.