What are bonds?

A bond is a security that certifies the relationship of a loan between its issuer (borrowers) and investor (lender). The issuer (the one who issued) the bonds is the debtor, and the investor purchasing the bonds becomes the creditor. A bond, as a rule, has a certain maturity (from one day to several years) but some bonds do not have a maturity – they are called eternal bonds.

All payments on the bond are secured by the debtor’s property and in the event of bankruptcy are mandatory and priority over payments on shares. The main accompanying document when issuing bonds is the issue prospectus.

A prospectus is an official document that is prepared by the issuing company and contains all the essential information both about the issuer and other details of the bond.

Bonds should be considered from two perspectives: from the issuing company’s side and from the investor’s side.

For issuing companies, bonds serve as an additional source of financing for their business, and for investors, as a more attractive investment instrument, compared to bank deposits.

When trading bonds, an investor’s income consists of two components:

Interest income (coupon income). The issuing company pays coupon payments on bonds to its creditors.
The difference between the purchase price and the sale price. Bonds can change their value by trading below (at a discount) or above (at a premium) par value.

Types of bonds by issuer (example of Russian Federation):

State. Issued by the government of the Russian Federation and considered the most reliable securities. These include federal loan bonds (OFZ).

Municipal. Produced by local government authorities. For example, it can be bonds of the Belgorod region or Krasnoyarsk region.

Corporate. Issued by legal entities (companies).

The main purpose of investing in bonds is to get passive income which is generated from the coupon. Bonds are capable of generating more income than a bank deposit, so they are of the greatest interest to conservative investors.