Bonds

Definition

Debt security by which the issuer undertakes to(it represents a debt of the issuer as a resultof its need for long-term financing) pay to the beared on a particular date the amount referred to in the bond with the interest included, or otherwise, as stipulated. The issuer has an obligation to pay to the owner of the bond interest-bearing income within agreed time period and to pay principal at maturity of the bond.

Bond owners usually receive periodic incoming payments, coupons, and principal is usually paid at maturity. On the other hand, they can also be also issued at a discount, with no payment of coupons but only of principal at maturity. They can also be issued with other embedded options (convertible into shares, related to the inflation, prior bond call, buy back right…).

The price is in a direct relation with interest rates on the market. If interest rates rise, the price of bonds falls, and reversely. Additionally, the longer maturity,  the greater price change.

These securities are placed on temporary accounts of the owner with the Central Securities Depository so that the owner would be able to exercise all of the rights arising from the above mentioned, they are transferred by means of a broker or bank to owner's accounts of the owners with the Central Securities Depository. Securities are dematerialise meaning that they are issued, transferred and recorded in the form of electronic recording in the information system of the Central Securities Depository in line with the regulations of that institution.

Bonds can be divided according to several different criteria:

I. According to the Issuer:

a. Government bonds

b. Municipal (city, local government) bonds

c. Corporate bonds

d. Bankbonds

 

II. According to the primary market:

a. Domestic bonds

b. Foreign bonds

c. Eurobonds

 

III. According to interest rates:

a. Bonds with fixed interest rate

b. Bonds with floating interest rate (floating-rate notes, FRN)

c. Bonds with combined interest rate

 

IV. According to the frequency of interest payment:

a. Discount bonds (zero coupon bonds)

b. Bonds with annual interest payment

c. Bonds with interest payment more frequent than per annum

 

 

Nominal Value of a Bond or Par Value

Nominal exchange rate (the amount assigned to the bond) is actually the principal which shall be collected by the investor from the issueron the date of its maturity.

 

Issue rate

Issue rate of the bond or its first cost price on primary market is actually pecuniary amount which must be paid to the issuer by the buyer at first sale of bonds.

Bonds with “al pari” exchange rate- when nominal value of a bond is equal to its first selling price  on the issue date.

Bonds sold at discount- when nominal value of a bond is higher than the first selling price

Sale of bonds with a premium– when a nominal value of a bond is lower than the first selling price.

 

Market Price of Bonds

Stock exchange rate or market price of the bond is actually pecuniary amount at which other and any further buying and sellingof bonds on secondary financial market. Daily formation of the bond exchange rate  is called quotation.

Bond price in secondary volume of business is a variable and its's in the function of its future cash flow and its equal to a current market price expressed in percentages. The change occurs as a result of changes of market interest rates which change the implied yield. Coupon rate remains unchanged.

Depending on the type of a bondinterest-bearing income  is generated in the course of 'life' of bond which is paid out within defined time intervals.

 

Frozen Foreign Currency Savings Bonds of the Republic of Serbia

(RS long-term bonds)

For the purpose of public debt settlement, the state of Serbia has issued bonds several times for the purpose of settling obligations of citizens' foreign currency savings and their conversion into the bonds of the Republic of Serbia.

These bonds are traded at the Belgrade stock exchange and via OTC

 

Company Bonds (Corporate)

Company (corporation) is bond issuer who undertakes to pay coupon that is defined in advance and at a specified date, as well as to pay principal at bond's maturity date.

This bond contains a priority rightover the owners of ordinary and preference shares with reference to the collection. This refers both to the flows (income) and to the assets of the company-issuer and refers to total obligation of the issuer towardsbond owners (principal and coupon).

Presence of credit risk can have an effect in such a manner that, for the purpose of increasing security, future owners of bonds shall be offered security (collateralised bond). That can be real asset (which can be sold and used for covering of obligations), third party guarantee (banks most frequently), investment into corporate bonds has their rating.

Trading these bonds takes place at stock exchanges (high-quality bonds – high rating bonds) but also over-the-counter (OTC).

They can also be issued as so-called Callable bonds or bonds withcall option.This optionallows the issuer to repurchasea bond at set price, within the time interval defined in advance, prior to maturity due date. Puttable bonds give that same possibility to the owners of bonds.

Convertible corporate bond provides a possibility of replacement with the number of shares of the issuer which are determined in advance. Key problem of creating and estimating this type of bonds is the value of conversion ratio, which defines the number of shares that each bond can be replaced with. Market value of the conversion–is a product of current value of shares that bond can be replaced with. Conversion premium– is defined as the difference of the bond and conversion value.

Bond with floating interest rate enables protection of the owner against the growing inflation. These bonds generate interest payment which are related to specific current market rate of return.