Financial literacy course: what is the difference between a promissory note and a bond

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

Securities (bill, bond) for most bank customers are something incomprehensible. In most cases, they go unnoticed. In this article, we will talk about how a promissory note differs from a bond and how these papers work.

What is a promissory note

A bill is a security that confirms the debt obligations of the debtor (drawer) to the creditor (bill holder). It must specify the amount of debt, the date and place of repayment of the obligation. All bank bills are made on special paper, which is difficult to forge or make changes. The bill must contain the following details:

1. Header indicating the type of bank bill.
2. Order text.
3. Personal data of an individual, or details of a legal entity.
4. Amount owed and interest (if any).
5. Place of debt redemption.
6. Debt maturity.
7. Date.
8. Signature of drawer (debtor).

A bill of exchange can be issued by any capable citizen who has reached the age of majority, orentity. But such a document is not issued by the executive authorities.

Promissory notes are divided into two types. The first is simple (when the bill obliges to pay the debt directly to the creditor).

Second - transferable (when the debt will have to be paid not to the creditor, but to a third party).

Application areas

The bill can be used in different areas of financial activity:

1. Payment for goods and services. That is, a debt can be transferred from one person to another. This use of the promissory note is popular in both small and large businesses.
2. Banks use the document to raise capital and lending. In this case, the debt can be transferred or sold to third parties.

Differences between a promissory note and an IOU

It might seem that a promissory note and an IOU are one and the same. But these documents have a number of significant legal differences. A promissory note can be drawn up in free form, while a bill of exchange is filled out on a form of a certain form. Obligations under the bill are stricter. They concern only money and ignore the subject of the transaction. The receipt must indicate the amount of the debt and a description of the transaction.

Definition of a bond

A bond is an issuable debt document. This paper confirms the fact that the company that issued the bond (the issuer) receivedmoney from a citizen. And obliges to pay the debt together with interest (coupons) within the agreed time frame. The interest rate on bonds can be floating or fixed. It will not change over time. The acquisition of bonds carries fewer financial risks than the acquisition of company shares. This is due to the fact that stocks can bring both profit and loss. Bonds bring profit to their holder. But they, unlike shares, do not give any ownership rights to the enterprise. In the event of liquidation of the issuer, the bondholder receives a pre-emptive right to the company's assets. What does it mean? If the organization that issued the bonds is liquidated, then the debts on the bonds will be paid first.

Bond Classification

Bonds differ in type, form of issue, circulation period and other features. Let's consider this classification in more detail.

By issuer, bonds are divided into:

• corporate (issued by joint-stock companies and large enterprises);
• municipal (issued by local governments);
• government (federal loan bonds for individuals);
• foreign (issued by foreign companies).

According to the release form:

• documentary (forms printed on special paper in a typographical way);
• uncertificated (presented as electronic documents).

By type of payment:

• coupon (during the validity periodbonds are paid interest income);
• discount (no interest income);
• with payment of income at maturity.

By maturity:

• short-term (maturity up to a year);
• medium-term (valid from 1 to 5 years);
• long-term (from 5 to 30 years);
• perpetual (maturity of 35 years).

Key characteristics of bonds

Before you buy a bond of an enterprise, you need to consider the main parameters of the security:

1. Currency. Bonds may be issued in any currency. Interest income and the final profit on the security will depend on this.
2. Face value. That is, the amount that is equal to the face value of the bond is transferred to the issuer.
3. Issue date and maturity date.
4. Coupon rate.

How does a promissory note differ from a bond

Despite the fact that a promissory note and a bond are debt-type papers, they have a number of distinctive features. Let us consider in detail how a promissory note differs from a bond.

1. These two documents have different functions. The bill guarantees the repayment of the debt, and the bond plays the role of a deposit instrument that saves money and makes a profit.
2. Bonds can be in electronic form. A bill of exchange is issued only on the form.
3. With the help of a bill it is possible to pay for products and services. While doing this procedure with a bond is extremely unprofitable.
4. Another importantthe moment regarding how a bond differs from a bill is the minimum financial risks.

Definition of a Federal Loan Bond

What is this? In the Russian Federation, such bonds were issued only in 2017. The maturity of the paper is 3 years. Federal loan bonds for individuals are a valuable form. It is sold to the population to replenish the state budget. To date, this type of bonds is the most profitable deposit instrument. Coupon income is paid every six months. In addition, these securities provide for a full refund (without paying income) in the first 12 months after the acquisition.

Gazprombank bonds

Most often, banks issue bonds. This type of securities is characterized by high yield and ease of acquisition. Consider Gazprombank bonds

On June 14, 2016, Gazprombank issued bonds in the amount of 10,000,000,000 rubles. denomination of 1000 rubles. each. The interest rate of this type of bonds is floating. As of June 2018, it was 8.65%. The maturity of securities is 3 years (until June 14, 2020). Coupon income is paid at the bank's offices every 6 months.