What Are Bonds (Облигации)?
Bonds (облигации) are debt securities issued by governments, municipalities, or corporations to raise funds. When you buy a bond, you are lending money to the issuer in exchange for periodic interest payments (coupons) and the return of the principal amount at maturity
Key Components of a Bond
Face value (par value) — the principal amount to be repaid at maturity.
Coupon rate — the annual interest rate paid to bondholders (can be fixed or floating).
Maturity date — the date when the issuer repays the principal.
Yield — the percentage return an investor receives over the bond’s term.
Price — the current market value of the bond (can be above, below, or equal to face value) .
Types of Bonds
Government bonds (Treasuries, Gilts, JGBs) — issued by national governments to fund public spending (e.g., US Treasuries, UK Gilts) .
Municipal bonds — issued by local governments to finance public projects (schools, roads); often tax-exempt .
Corporate bonds — issued by companies to raise capital for growth or debt refinancing; classified by creditworthiness (investment grade or high-yield) .
Zero-coupon bonds — sold at a discount, no regular interest payments; profit comes from the difference between purchase price and face value at maturity .
Convertible bonds — can be converted into a set number of common stocks of the issuing company .
Floating-rate bonds — interest rate adjusts based on benchmark rates (protects against interest rate risk) .
High-yield (junk) bonds — issued by lower-rated corporations with higher credit risk; offer higher interest rates .
Sovereign bonds — foreign government bonds priced in a currency other than the investor’s home currency (e.g., Eurobonds, Samurai Bonds) .
Green bonds — finance environmentally beneficial projects (renewable energy, sustainable infrastructure) .
Perpetual bonds (consols) — no maturity date; pay interest indefinitely .
Inflation-linked bonds — principal adjusts with the Consumer Price Index (CPI) to protect against inflation .
Callable bonds — issuer can redeem the bonds before maturity at a predetermined price .
Foreign bonds — issued in a foreign country’s currency (e.g., Yankee bonds in the US, Samurai bonds in Japan) .
Asset-backed securities (ABS) — secured by a pool of assets (mortgages, loans) .
Secured vs. unsecured bonds — secured bonds are backed by specific assets; unsecured (debentures) rely on the issuer’s creditworthiness .
Bond Classifications by Maturity
Short-term bonds — maturity < 2 years.
Intermediate bonds — maturity 2–10 years.
Long-term bonds — maturity > 10 years .
Benefits of Investing in Bonds
Predictable income — regular interest payments.
Diversification — reduces portfolio volatility.
Capital return — full principal returned at maturity.
Priority in bankruptcy — bondholders are paid before stockholders .
Risks of Bond Investing
Interest rate risk — bond prices fall when interest rates rise.
Credit risk — risk of issuer default.
Inflation risk — purchasing power of returns may erode.
Liquidity risk — some bonds may be hard to sell.
Currency risk — for foreign bonds, exchange rate fluctuations affect returns .
How Bonds Are Traded
Primary market — new bonds issued by the issuer.
Secondary market — existing bonds traded between investors (e.g., stock exchanges, over-the-counter markets) .
Key Terminology
ISIN (International Securities Identification Number) — 12-digit code uniquely identifying a bond.
Coupon payment — periodic interest payment to bondholders.
Yield to maturity (YTM) — total return if the bond is held until maturity.
Current yield — annual interest payment divided by the bond’s current price.
Bond rating — credit assessment by agencies like Moody’s, S&P, Fitch (e.g., AAA, BBB, etc.) .
Conclusion
Bonds are a crucial part of a diversified investment portfolio, offering a balance between income generation and risk management. Understanding the types, features, and risks of bonds helps investors make informed decisions.