Types and value of bonds: where better to invest?
Bonds are a kind of promissory notes. The Issuer of such securities is a company or a country that borrows money, but promises to pay them in a strictly fixed period.
Bond buyers are sure when and how much money they will get back. Bonds allow to assess the benefits.
Redemption of bonds is the payment of a fixed amount on time. The only problem that may arise for the bondholder is the bankruptcy of the company (default of the state). The insurance system does not apply to this type of securities.
According to the form of payments, these assets are divided into interest (they are also coupon) and discount. In the first case, the holder receives interest on the face value. The payment of % is the redemption of the coupon. The interest rate on such bonds can be fixed and floating (tied to macroeconomic indicators). If we talk about discount assets, they are bought at a price below par. The discount is the difference between the purchase amount and par value.
If the maturity date is one year or less, these are short-term assets. 1-5 years – medium-term bonds. When you are borrowed money for a period of 5 years, you are dealing with long-term securities.
Bonds can be issued in the domestic currency of the country (for example, in rubles), as well as in dollars or EUR.
Also, this type of securities is classified based on their Issuer. In particular, if the bond was issued by the Russian Federation, it is a state loan. The country needs it to cover the budget deficit. The securities issued by the US Treasury are most valued on the world markets. Perhaps this is the most reliable investment tool in the world.
There are also bonds issued by local governments to finance their projects. Finally, it is possible to purchase corporate securities. Thus, companies attract additional funds for development.
Bond value and risks for the investor
It is recommended to buy secured assets. For example, a company that is confident in long-term development leaves real estate and equipment, as well as other securities (if any) secured. The owner of the bonds will be able to cover his expenses in case of the Issuer’s bankruptcy. Often one company is entrusted to another, especially in holdings. One company turned bankrupt – the question of payments is addressed to another. State or bank guarantee is the most reliable. For example, a country will not pay for its bonds only if it defaults.
Unsecured assets are more difficult, but after the bankruptcy proceedings some part of the finance can be returned. Finally, subordinated unsecured bonds are the most unreliable. With a high probability, the bankrupt company will not pay anything.
In addition to the risk of default, after all there is an inflation. These are dangerous long-term bonds: few people can predict what will happen in the long run with the currency in which the security is issued. In this case, it is necessary to pay attention to the dynamics of inflation over the past 5-10 years and calculate whether it can be profitable to buy bonds.