Bond as one of the types of securities

One of the main functions of any security is the provision of profit to its owner, 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, as a paper, to which the coupon was attached, where the percentage of the yield and the date of receipt were indicated. After that, on a certain day, the owner received money on the bond, and the coupon was extinguished.

So, a discount bond is a zero-coupon security , because it does not set the rate of return. The owner of such a security buys it at a price below the face value and receives an income from a discount, that is, with a difference. The Russian stock market very often uses this type of bond. A typical example of a discount bond is a government short-term zero-coupon bond, which is sold from auctions at a price that differs from the nominal value in the lower side.

Usually, when issuing a bond, the issuer establishes a certain face value of the security and the rate of return in percent. The coupon bond usually has a fixed interest rate, which is indicated on the bond itself. During the entire period of its circulation, it receives a permanent income. It should be noted that it is possible to establish such a constant interest rate only if the economic situation in the country is stable, when rates and prices remain almost unchanged. Otherwise, a fixed interest rate entails greater risks for the issuer. If interest rates are lowered, he will have to pay income at a rate that is fixed at the time of issue.

Naturally, the issuers found a logical way out of this situation. They began to issue bonds with floating interest rates. Such bonds were widely spread in America in the 80s, when the trend of setting high interest rates and their frequent change was seen. For companies it was profitable to issue bonds with a variable interest rate, which was tied to a certain indicator, which, in turn, reflected the situation in the financial market in real terms. 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 the bills. Most often, the bond interest rate consists of two components: the interest rate on the treasury bill plus the risk premium of 0.5%.

If you look at the situation on the Russian securities market, a typical example of a floating rate bond is federal loan bonds that have a variable coupon, or government savings loan bonds. The yield of the latter directly depended on the yield on GKOs. Payments on coupon bonds are periodic, depending on the conditions established at the issuance of the bond, income on it can be obtained once a quarter, half year or year.

Sometimes a bond can be issued with a coupon on which fixed interest is registered, plus a security is sold at a discount. Then the owner receives income from such a security "doubly": he has regular coupon payments, and when redeeming receives additional income.

In conclusion, I would like to mention such a valuable paper as a yieldable bond. We will try to give her a definition. A bond of this kind brings revenue only if the firm has a profit. There is no income, no profit. An income bond can be simple or cumulative. On a simple bond for the past years, "idle" income is not paid, even if in the subsequent period of time the company receives a high profit. But on cumulative bonds income is accumulated and paid as far as possible. The accumulation period is usually limited to three years. Naturally, when the company is liquidated, cumulative bonds are much higher than common stocks and simple bonds.