How to choose bonds for investment?

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Bonds are like a bank deposit. Their essence is the same and consists in lending, in one case, to a banking organization, and in the other, to an issuer, which can be played by the state along with the subjects of the Federation and commercial companies. True, bonds have more parameters within the scope of choice. Before choosing bonds for investment, it is necessary to study the following parameters: the price that will change, coupon yield, maturities with offers, and so on. The yield of bonds directly depends on these characteristics. We will learn about all the intricacies of how to choose bonds by studying the article to the end.

Difficult choice

Today, experts recommend for purchase:

• Bonds of large financial institutions from the top 30 (excluding state and institutions with foreign participation). Suitable, for example, Promsvyazbank, Otkritie and MKB.
• Subfederal bonds (in thisin case of personal income tax, the coupon is not charged).
• Eurobonds with a maturity of two to three years and an investment amount of two hundred thousand dollars. Sberbank, VEB, and VTB have yields on eurobonds in foreign currency ranging from three to six percent or more, even taking into account personal income tax. This is much more than what is offered by banks for foreign currency deposits, however, the entry threshold is from one thousand dollars to ten.

How to choose bonds for investment, it is important to find out in advance. With regards to industry companies, experts recommend avoiding economic sectors such as the banking sector, air travel and construction. With the exception of backbone organizations, which the state helps to stay afloat. The lucky ones, as a rule, include state-owned banks (Sberbank, VTB), along with large private financial institutions (Alfa-Bank), and in addition, Aeroflot.

Recommendations for 2019 on how to choose bonds to buy are reversed and are to buy what suffers more from Western sanctions, namely construction companies.

Bond Features

Answering the question of how to choose bonds, it is worth analyzing in more detail the main characteristics of these securities:

• Nominal price (for example, one thousand rubles or dollars). It is also the redemption value and is usually set by the issuer.
• Market value is usually formed on the exchange as a result ofbargaining.
• Maturity is seven years. We are talking about the period after which the issuer undertakes to buy back its securities for their nominal price.
• Bonds are characterized by coupon yield, that is, the size of the regular payment to the owner of the paper.
• Another distinguishing feature is earnings to maturity (for example, seven percent). The total amount of all profits is implied, which shows how much money will be received in the end.

It turns out that by acquiring a bond and holding it in his portfolio until maturity (the reverse procedure of redemption by the issuer), the client has the right to count on an annual seven percent profit. This also includes coupon payments.

What indicators should investors focus on?

How to choose bonds may at first glance seem like a rather complicated question, but it is much easier than choosing certain stocks. The client does not have to spend hours studying the company's reporting along with the prospects for the economic sector or current trends in legislation. For him, as a bondholder, only one thing is important, namely, the financial institution must be solvent. True, there are still a number of criteria that it would be nice to understand before choosing the right bonds to buy:

• One of them is the market sector (we are talking about Eurobonds, corporate, municipal, state).
• Type of coupon (fixed, indexed, discounts are implied).
• Sector of issuers (banks, construction, transportalong with light industry, oil and gas).
• Timing period.
• The issuer has a rating.

What are the main risks of the holder? They consist in the fact that the issuer may suddenly declare himself bankrupt and will not be able to buy back his debt at the stage of bond redemption. Moreover, even large companies that have been operating in the market for years are not immune from such an unpleasant situation.

Corporate bonds

How to choose corporate bonds and what you should pay attention to, we will analyze below. This is a financial instrument through which a private enterprise can attract additional funds into its business activities. The issuer issuing these securities retains absolutely complete control without restructuring the ownership of the company. Corporate bonds enable entrepreneurs to make a profit through a lower rate compared to bank interest. The purpose of issuing short-term loans is to raise funds in order to increase the volume of cash turnover opportunities.

Attractiveness of issue of corporate bonds for issuers

Compared to issuance, the issue of a corporate bond allows owners, without changing the structure of the enterprise, to create an entry into the capital market. In addition, it is necessary to take into account the fact that Russian organizations are undervalued on the stock market, and, consequently, an additional issue and release of shares into freecirculation at a low price will significantly dilute the share of existing shareholders. So what do you choose: stocks or bonds? Next, let's talk about the intricacies of such papers.

Features of corporate bonds

Many people are interested in corporate bonds. How to choose the right bonds of a private company, because they are not only debt securities, but also stock, emission, exchange, market, casual or term instruments? Investment value has the following parameters:

• It usually expresses a loan or debt relationship between the owner and the issuer of the security.
• This is an independent object that has its own course and is freely circulating on the market.
• A bond has parameters in the form of yield, liquidity, reliability and other investment qualities.

Corporate bonds have a face value and a market price. The first is the amount that the issuer takes from the borrower and must return at the end of the bond's circulation period. The nominal value is the base value in calculating the yield that a security must necessarily bring. True, in circulation, from issue to maturity, the bond is sold and bought at a price that is set by the market. This price may be less than face value, as well as higher or similar to it.

Corporate bond as a financial instrument

Selecting bonds is usually difficult. Especially when it comes to corporatebonds. When choosing, you should pay attention to the fundamental difference between long-term and short-term corporate bonds. The former act as zero-coupon bonds. Their income is discounts. As a rule, they are traded below the nominal price, but the closer the maturity date of the securities, the higher its total value. Long-term bonds provide the owner not only with a nominal return, but also with a coupon (that is, periodic) interest. The goals of the release are also considered important, which can be as follows:

• The current shareholder retains control of the enterprise.
• The procedure for raising funds ensures the implementation of upcoming or current tasks.
• Financing of promising projects of the issuer.
• The process of refinancing debts held by the issuer.
• Funding an additional project that is not related to the main type of activity.

What are OFZs?

It is necessary to talk about what OFZ is and how to choose OFZ bonds. They are bonds issued by the Ministry of Finance of our country. They arose quite recently, but have already aroused a certain interest among analysts, and in addition, owners of individual investment accounts, including brokers. OFZs are classified as coupon-type securities, that is, they allow you to receive a certain percentage payment directly from the face value.

Types of OFZs

To the customerwas able to decide how to choose OFZ bonds for purchase, it is worth listing their main types:

• OFZ with PD. These bonds have a constant coupon yield. This is perhaps the most common type of government securities. Their yield, as a rule, consists of the following two components: the difference in price at the date of purchase and redemption, the amount of the coupon payment. This is the best option given the unstable state of the economy.
• OFZ with PC are bonds with a variable coupon. The size of the coupon payment on them varies and is calculated based on various indicators, for example, the level of inflation. They are a riskier option than conservative OFZs with PD. It is recommended to invest in them when a person is confident in the growth of the economy and its main rates.

Who is IIS suitable for?

Investing in the open spaces of the securities market is always a risky activity. The client may lose all his funds due to an unfortunate combination of circumstances prevailing in the financial market. A deposit in a financial institution will definitely bring a person known in advance interest, albeit small. An individual investment account (IIA) is a way of investing, and no one can guarantee its profitability, as well as safety.

Before choosing bonds for IIA, you should pay attention that investments in IIA in the deposit insurance agency are not insured, that is, the state does not guarantee a refund if a personal broker or manager loses his license. On IISfunds are not insured, but if they are invested in securities, then even after the bankruptcy of a broker or management company, a person remains the owner of these securities.

What are the advantages of IIS?

IIS is a securities account. Its main advantage is the encouragement from the state in the form of the opportunity to receive a deduction, which allows you to pay a much smaller amount of tax or return the interest already paid.

IIS features

Distinctive features are the following characteristics:

• Customer can get tax deduction.
• Contributions can only be made in rubles.
• The maximum contribution is one million rubles a year.
• In order for the tax deduction to work, the account must be open for three years.

You can choose one of the following two types: a deduction on a contribution or directly from income subject to tax. In order to receive any of the deductions, it is necessary to open an IIS and not close it for at least three years. Within twelve months, a certain amount should be paid to the IIS (but, as mentioned above, not more than a million rubles).

After the end of the tax period, a person can receive a tax deduction in the amount of thirteen percent of the amount that he contributed for the year, but not more than fifty-two thousand. It should be noted that the maximum amount for calculating the tax deduction is four hundred thousand rubles.

What determines the profitability of bonds?

First of all, from the type of this paper. For example, the profitability of federal loan bonds is strictly tied to the key rates of the Central Bank. It is most profitable to buy OFZ during a temporary increase in rates. The reliability of the issuer is also of great importance, that is, the higher the risks of bankruptcy of the company, the greater the profit offered.

We looked at how to choose bonds to invest in.