How a company repurchases its bonds under an offer. Bond yields: in simple words What is the nearest offer
Offer: details for an accountant
- Option to sell shares in a company. Practical aspects
Irrevocable the offer is considered accepted from the moment of notarial... does not entail the invalidity of the acceptance of an irrevocable offer. In fairness, we note that...
- We attract self-employed people to work
Russian Federation, a contract is concluded by sending an offer (proposal to conclude an agreement) to one of... at the moment the person who sent the offer receives its acceptance (Clause 1 of Article... Article 437 of the Civil Code of the Russian Federation of the offer (public offer). Moreover, in accordance with ... of the Civil Code of the Russian Federation, committed by the person who received the offer, within the time period established for it... by acts or not indicated in the offer. What documents to confirm the costs of...
- Online service instead of an accountant: how an individual entrepreneur lost 1.5 million rubles.
The services were agreed upon by accepting the offer located on the website, and... an annex to the offer agreement was signed describing the services that would be... the basis of the relationship was regulated by the offer. According to clause 2.1 of the offer, “The Licensor undertakes to provide... the capabilities of the Service.” In other words, according to the offer, the organization does not provide services for...
- Professional income tax: what an institution needs to know
2 tbsp. 437 of the Civil Code of the Russian Federation with an offer (public offer). Moreover, in accordance with... the Civil Code of the Russian Federation, the commission by the person who received the offer, within the period established for it... by acts or not indicated in the offer. Taking into account the above, when providing...
- Purchase and sale of part of a business
The other party did not accept the irrevocable offer in the manner and within the time limits provided... . The court emphasized that if the offer was not accepted by the plaintiff (and... the plaintiff did not accept the irrevocable offer of the defendant, accordingly, as it rightly considered... did not take advantage of, did not accept the irrevocable offer of the seller, accordingly the option terminated...
- Standard Articles of Association for an LLC? No thanks!
Reflect the real mechanism for sending an offer for its sale. According to the law... the offer is considered received by all participants... The law does not provide for a further procedure for sending an offer by the director. Hence...
- New realities of banks’ formal fight against money laundering
An agreement, even in the form of a public offer, protects you from deception. On... (including the public offer agreement). Next, you need to check your bank details..., indicating: “Payment under a public offer agreement for goods. Without VAT". IN...
- Gift of money to an employee: tax nuances
It has been established that the commission by the person who received the offer, within the period established for it... by acts or not indicated in the offer. Personal income tax Upon actual receipt from...
- We include employees as co-owners - how not to harm yourself?
Agreement) one party, by means of an irrevocable offer, grants the other party the right to conclude... to conclude an agreement by accepting such an offer in the manner, within the terms and... days and constitutes an irrevocable offer and is drawn up in notarial form...
- Option agreement: rights of an LLC participant
A. Lukiyanov was issued an irrevocable offer to sell his share in..., an option to conclude a contract is an offer that the other party can accept...
A person can live for a long time on money,
which he is waiting for.
William Faulkner, American writer
It is more convenient and easier to take into account your assets and return on investments in a specialized program. I use Family 10.
Bonds are a good conservative instrument along with bank deposits. But it’s easy to compare deposits with each other; we set the terms and amounts and look at the interest rate. Where there is more, it is more profitable. The frequency of capitalization and interest payments practically does not change the picture.
When we start looking closer at bonds, many new words and terms arise that refer to the properties of a bond that affect its yield. NKD, YTM, coupon, discount, offer, duration... In this article we will not touch upon assessing the reliability of the issuer. We will compare bonds solely by yield.
So, the first thing a bond investor faces is the coupon yield.
Coupon income is a periodic payment to bondholders. There are bonds with a fixed coupon rate and with a floating one. A fixed rate means that the coupon payments are a certain percentage of the bond's face value and do not change over the life of the bond. The floating rate changes due to external circumstances. For example, it may be “tied” to the Central Bank refinancing rate.
The coupon yield is obtained by dividing the coupon payments by the purchase price of the bond.
If you bought a bond at par for 1000 rubles with a coupon rate of 10%, then you will receive this 10% per year. In two years you will receive 20%, etc. depending on the term of the bond. Please note that there is no compound interest in coupon payments.
It would be possible to estimate the yield of bonds by the coupon rate if they were sold at par all the time. But that's not true.
Most bonds are issued at a discount—at a price below par. And the laws of supply and demand operate on the stock exchange, so at the time of purchasing a bond, its price can be either higher or lower than its face value. This affects the yield, since the issuer will repay the bond at par.
Accumulated coupon income (ACI) is that part of the coupon income that has been accrued but not yet paid to bondholders. Example: coupon income is paid on December 31st, you buy a bond on December 1st. You do not have the right to receive the entire coupon income for the year, because for 11 months the security did not belong to you. You must pay an amount equal to the coupon income for the period from January to October to the previous bond holder.
In general, the purchase price of a bond is equal to the bond's quotation on the stock exchange plus the NKD. The income tax depends on the coupon rate, the frequency of coupon payments and the dates of these payments. The NCD changes every day and is indicated next to the quotes of a particular security.
That's it for your expenses. Let's move on to income. First, the bond can be held until maturity.
The advantage of this is that you know exactly how much you can expect, since the issuer repays the bonds at par. Secondly, you can accept the offer, that is, the issuer's offer to redeem the bonds early. The redemption price is set by the issuer and may differ from the face value. Thirdly, you can sell the bond on the stock exchange at current quotes.
Using the last two methods, it is difficult to predict profitability - no one knows what bond quotes will be in the future, at what price the issuer will make an offer... But price fluctuations on the bond market are significantly lower than fluctuations in stock quotes. Quotes “spin” around the face value. In the bond market, quotes are usually indicated not in money, but as a percentage of the face value. And you can immediately see which securities are sold at a discount and which with a premium.
To assess the investment attractiveness of bonds, the Yield to Maturity (YTM) indicator is used.
The yield to maturity indicator most often overestimates the real yield, since its calculation makes the assumption that all coupon payments will be reinvested in the same bonds. In practice, this is not always possible. If you are the owner of one bond with a par value of 1000 rubles and received a coupon in the amount of 100 rubles, no one will give you one-tenth of the bond with this money - these are not mutual fund shares for you.
You can calculate the yield to maturity yourself: for example, in Excel, using the NET INN function. As arguments, you need to indicate the dates and amounts of your expenses and income. But usually the YTM indicator is published along with the quotes. For example, . Please note that for some bonds the “yield to offer” indicator has been calculated - this means that the offer has been announced and the redemption price is known. Some bonds lack both yield to maturity and yield to put. This indicates a floating coupon rate. Since coupon rates are unknown, it is impossible to calculate the yield.
Example of calculating bond yieldLet's take a bond with a not very long maturity. For example, . The bonds were issued in 2005, coupon payments - once every six months, par value 1000 rubles, maturity date 05/26/2015. The coupon rate is 8.5%.
On April 19, 2012, the investor decided to support the trade in children's goods. We look at the “Trading Results” tab, the bond quote is 96, that is, one bond can be bought for 960 rubles. In this case, the Tax Tax is 31 rubles 44 kopecks. An investor will spend 991 rubles 44 kopecks on one bond - these are expenses.
To estimate future income, look at the “Payments” tab; the dates of coupon payments and the payments themselves are indicated there in percentages and in rubles. The coupon rate is 8.5%, payments are made twice a year, which means each must be 4.25% of the face value. The selected bond has payments in unequal proportions (4.285% and 4.215%). We write down the dates of future payments and their amounts in rubles in Excel. Don't forget about redemption, which usually occurs on the date of the last coupon. We add the first row to the resulting table, in which we indicate today’s date (April 19, 2012) and the investor’s expenses for purchasing the bond. We indicate expenses with a minus.
We use the NET INDOH function in Excel and get 10.278%. This is more than the coupon rate due to the large discount. A large discount is most often associated with an increased risk of default. You can decide whether to accept it or not after carefully checking the issuer. By the way, YTM could not be counted, but looked at on the “Trading Results” tab. As of April 19, the figure there is 10.278, which is exactly what we got in our calculations.
YTM can be used to evaluate alternative investments.
If you have an alternative with a yield of more than 10.278% per annum, then it is better to refuse to lend to Detsky Mir, and vice versa: if your alternative has a lower yield, then invest in bonds. Important: alternatives must be approximately the same level of risk.
It’s pointless to compare YTM and the MICEX index, but with bank deposits it’s just right.
Successful investments to you!
The VimpelCom company in the fall of 2017 changed the coupon rate on bonds: instead of 11.9%, it offered investors... 1% per annum. Why? Paying almost 12% per annum in an environment of falling rates and inflation approaching 4% is too expensive. The company decided in this way to force investors to hand over the papers under the offer. We will understand what an offer is, how companies manage investor behavior and what the latter should do.
There is also a call option - in this case, the company has the right, at its discretion, to buy bonds from investors who are obliged to sell them in this case. Such an option, on the contrary, increases the investor’s risks - if rates decrease, the company may withdraw a highly profitable issue, which means a loss of profitability for the investor. Usually a company does this when rates fall - let's say it had an issue with a coupon of 7%, rates dropped and the company wants (and can, which is important) to borrow at 4%. Then she announces an offer (call option), buys back the bonds and issues new ones - at a lower interest rate.
Despite the fact that the type of offer is defined and described in the prospectus, companies can encourage investors to take certain actions. For example, if rates are rising and the company does not want investors to bring it the entire issue under the offer (in this case, it will have to buy back the securities and then re-borrow at a higher interest rate), it can increase the coupon. This can be done because at the time of placing the company determines the rate of the coupon that it will pay before the offer date. After it, the rate is determined again - the company will pay this percentage until maturity (or until the next offer).
For example, the Krasny Kotelshchik company issues bonds worth ₽2 billion with a maturity of five years; the coupon rate that the issuer will pay until the offer matures is determined as 13% per annum. The issue provides for an offer (put option) in a year. However, the market situation is changing, and market rates are rising. On the eve of the offer, Krasny Kotelshchik realizes that it is not ready to buy back the issue and borrow again at higher rates, then it announces that it will now pay a coupon of 15% per annum. Investors rejoice and decide to keep the papers for themselves - holders of only 30% of the issue demand to repay the bonds. Investors who sold these 30% of securities receive their 13% per annum and the entire invested amount. Holders of the remaining 70% of the issue, who retained the securities until maturity, receive a coupon income every year at the rate of 15% per annum.
In this case, it is important that the issuer sets a market coupon: if it is much higher than that of competitors, investors will think “does the company have problems” and bring all the securities under the offer.
The opposite case - rates are reduced, and “Red Kotelshchik” understands that it is more profitable for him to repay the debt taken out at a high interest rate, and immediately re-borrow at a lower one, and decides to buy back the bonds. But he has a put option - investors also understand their benefit and do not want to give up the securities. Then the company takes and sets the rate for the next coupon at 1% or even 0.01%, thereby stimulating investors to hand over the securities under the offer. Nobody needs such a low coupon and investors are happy to present the papers. This was done by VimpelCom, which was able to buy out the entire issue under the offer. However, even in such cases, sometimes 1-0.5% of the securities still remain in circulation due to inattentive investors who forgot about the offer or did not find out from their broker exactly how to go through it.
If the company pulled off such a trick, essentially showing the investor the door, declaring that it will continue to pay 1% per annum, the investor should take advantage of the offer. This is a routine activity for bondholders, but it requires time and effort.
Information about the upcoming offer and the procedure for submitting documents are always known in advance and published in open sources - on specialized websites, in the prospectus for the issue or bond program (these documents can be found on the company’s website). The broker reports the same thing on its website in a more accessible form.
If your issue provides for an offer in a year, then about a month before this event you need to start following the news and studying the information that is published on the issuer’s website or on the information disclosure website (for example, e-disclosure.ru) in the section “Material facts" . On the eve of the offer, a message will appear in this section about the offer and the company that accepts applications (agent), as well as about the new coupon rate. The new rate is important information on the basis of which the investor decides whether to hand over the securities to the issuer or not.
If the rate is bad and does not suit the investor, he needs to notify the company of his desire to hand over the papers on the dates specified in the message. This can be done directly by sending an application by registered mail to the address specified in the bond program or prospectus. The application form is located in the official release documents.
The application can also be submitted to a broker via the Internet. In this case, most likely, you will have to call back to make sure that the order has been accepted. The broker may ask to send instructions in advance - 2-3 weeks before the offer and stops accepting 1-2 days before the official deadline of the issuer. Each broker has its own cost for this service: some do without additional fees, limiting themselves to only the commission for completing a transaction, while others may require you to pay up to ₽1,500.
A registered letter with a statement or an instruction to a broker is not enough to accurately sell your securities under the offer. On the day of the offer, you must also go to the trading terminal and submit a targeted order to the issuer in the mode of negotiated transactions. But this is not always possible: you need to check with the broker the day before whether it is possible to place such an order. If not, you need to submit a voice order to the broker (that is, call him).
In the Yango service, the process of completing an offer is free of all the difficulties described above. About two weeks before the offer date, Yango sends clients a message about the upcoming event. It contains a recommendation whether it is worth presenting the paper to the offer or whether it is better to leave it until maturity. The company's experts evaluate market conditions and also compare the new rate on the issue with comparable securities of other issuers. In addition, the service message contains detailed instructions with further actions for everyone who wants to repay the paper ahead of schedule.
If the decision on the offer is made, it is enough to simply sell the paper in the application and receive your money before the offer date. The service will do the rest. After this, the entire amount of the debt with interest will be credited to your account.
To everyone who missed messages about offers for issues where the issuer reduces the coupon rate to a symbolic 1%, the company calls personally to warn that the issuer has actually shown holders the door.
The most important!
✔ You need to prepare for the offer in advance. As a rule, brokers require clients to submit documents for early repayment or communicate their desire at least 2 weeks in advance.
✔ It is necessary to follow the news of the issuer; on the eve of the offer, he announces a new coupon rate, after which the investor decides whether to keep the securities in the portfolio or present them for early redemption.
✔ If you decide to submit papers for an offer with the help of a broker, you need to study the conditions of your broker - how many days before the offer you need to submit an order, whether it costs additional money, etc.
✔ Submitted application does not guarantee acceptance of the offer. In order to repay a bond ahead of schedule, on a certain day and at a certain time, you must place a targeted order in the name of the issuer in the negotiated transactions mode of the Moscow Exchange.
Wiki DictionaryAn intelligible dictionary of terms and definitions of the bond market. A reference base for Russian investors, depositors and rentiers.
A put option is a type of offer when investors have the right (and not the obligation) to present securities for early redemption, and the company is obliged to do this.
A call option is a type of offer where investors are required to present a security for redemption if the company announces an offer. The company, in turn, has the right (and not the obligation) to make an offer.
Percentage point (pp) is a unit used to compare values expressed as percentages. If the coupon rate changed from 7% to 5% per annum, this implies a change of 2 percentage points.
A nominee is a type of intermediary, most often a broker, who has the power to specifically apply for an offer on behalf of the bond investor.
A market maker is a company, usually a broker, that trades on the market in order to maintain the liquidity of exchange trading for a particular security. He buys paper from everyone, when there is no one else, and sells it when there are no other sellers.
NPS (negotiated transactions mode on the Moscow Exchange) is a mode in which the buyer and seller enter into a deal with each other without placing an order for public viewing in the exchange glass. Such transactions do not affect the price of the security, because when they are concluded, the exchange mechanism that moves quotes is not involved - the buyer and seller simply agree with each other without involving outsiders.
29.10.18 54 087 23
Investor's personal experienceBonds are considered one of the least risky instruments in the stock market.
Stas Shpak
private investor
This is true, but “least risky” does not mean “absolutely reliable.” Like any asset, bonds have financial risks. This could be a loss of profit, partial or even complete loss of investment.
Today we’ll talk about corporate sector bonds - those in which you lend to private companies. For government bonds, some points are also relevant. If you don't already know how bonds work,
In this article I will talk about several ways to lose money on bonds. I have experienced some of the methods myself. Don't repeat my mistakes.
Blind faith
In November 2017, I became interested in the bonds of Home Money LLC. I have invested through P2P platforms before and the experience was positive. Therefore, I considered the market promising.
I assessed the issuer superficially, because I was sure that in such a profitable area everything should be fine with it, and I bought bonds at a price of 96.93% of par. I was going to repay them under the offer on April 26 next year.
An offer is an obligation of the issuer to repurchase bonds at a predetermined price (usually 100% of par value). If the bond issue provides for an offer, then the bondholder may not wait for the maturity date of the bonds, but repay them at par on the date of the offer.
The yield on the offer when purchasing was about 18% per annum - at first glance, quite a lot for bonds, but the yield that I received from lending through the P2P platform was about 20%. Therefore, I did not consider this figure to be too high.
But then something went wrong with the quotes: they gradually fell. On the Banki.ru forum I found a long discussion about the issuer, where alarm bells were already ringing. But I believed in the best, and the offer was getting closer. In addition, the issuer paid coupons regularly.
April 26th arrived. The company (allegedly) tried its best to find money for the offer, but it didn’t work out. Quotes collapsed, but I continued to believe that the company would get out. I also didn’t want to sell papers for a third of the price. The company announced a restructuring plan, which it itself failed three months later.
Now AHML, one of the major creditors of Home Money LLC, is filing a claim for bankruptcy of the company. Bonds can be sold at a price of 0.85% of par value. I recorded a loss and sold part of the bonds at 2.6% of par value, and kept the rest as a souvenir of what happens when you believe blindly.
In total, taking into account the paid coupons, I lost 91.78% of the funds invested in these bonds.
Leave it to chance
Samaratransneft-Terminal LLC is engaged in the production and sale of petroleum products. “What bad can happen to a company in the oil industry?” - I thought and in February 2018 I bought bonds of this issuer at a price of 100.35% of the par value. The yield on the offer when buying was about 11% - indirect evidence that the risk here is small, although above average.
In May 2018, strange things began to happen to the issuer: there was a fire, then a suspicious change of CEO, then the company filed for self-bankruptcy. Prices dropped by up to 60%.
A few days later the claim was withdrawn and the price of the securities returned to their previous values. If I had been following the quotes, this would have been a great chance to figure out what happened, reassess the risks and close the position with a small plus (taking into account the coupon income received). But I let everything take its course and didn’t follow up.
In the second half of June, two large lawsuits were filed against the company; the owners and shareholders started an incomprehensible fuss and defaulted on one of the bond issues. Quotes fell again to 60% and gradually slid to 20%.
I currently still hold bonds from that issuer. I am watching the developments of events with interest and do not particularly count on a successful resolution of the situation.
If I now record a loss on the position, my financial result on this security will be minus 61.86% of the purchase costs. In the worst case, the final loss will be 94.27%. And if now it seems to you that I am blindly believing again, then it doesn’t seem to you.
Junk bonds
“Junk bonds” are securities that are traded at a significant discount to par, so they have extremely high yields. But this yield is difficult to obtain: the issuers of such bonds are experiencing serious financial difficulties or are even on the verge of bankruptcy. High profitability is due to high risks - you can earn a lot or lose a lot. There are investors who buy such junk bonds.
Sometimes you can really make money on this: for example, this was the case with B&N Bank bonds. When the bank started having problems, the value dipped a little, and then sharply fell to 80-85% of the nominal value with a short-term drawdown of almost 60%. But when the smoke cleared and the bank ended up in the banking sector consolidation fund, quotes returned to their previous level.
But such rescues do not happen often. If the issuer is in serious trouble, quotes remain low or continue to decline. On high-risk bonds, you can lose even more than 100% of the money invested (the cost of the bonds themselves plus brokerage commissions).
Skip offer
Sometimes, when issuing bonds, the issuer provides an offer - a date for early redemption of the securities. Usually on these same dates the coupon size is revised. This is convenient for both investors and the issuer.
For example, a company issues bonds for a period of 5 years with a coupon of 10% per annum and sets the offer date 3 years after the issue. If after 3 years the company still needs money, the coupon will be revised so that investors are interested in holding or buying bonds. If the company does not need borrowed money, the coupon will be minimal. In this case, investors get rid of the securities, presenting them to the offer at a price of 100% of the par value.
It is important for investors to monitor the offer dates of the bonds in their portfolio. If you don’t do this, you may be left with paper that provides virtually no profitability.
Example: bonds Binbank-3-1-bob (code RU000A0JRZ74); placement 07/16/2013; maturity date 07/16/2025. This release includes several offers.
On the date of payment of the tenth coupon, an offer was provided, after which the issuer established a coupon of 0.01%, valid until the end of the issue period. Bond prices have decreased accordingly to reflect market conditions: when the coupon yield is virtually zero, the only way for an investor to obtain a yield from a bond is to buy it at a significant discount.
But if an investor bought these securities at a price close to par, counting on a coupon yield of around 11%, and then missed the offer, his losses will correspond to the percentage by which the value of the bond has decreased.
What would you like to achieve by investing in bonds? Save money and get extra income? Saving for an important goal? Or maybe you dream about how to gain financial freedom with the help of these investments? Whatever your goal, it pays to understand the return your bonds provide and be able to tell a good investment from a bad one. There are several principles for assessing income, knowledge of which will help with this.
What types of income do bonds have?The yield of a bond is the percentage income received by an investor from investing in a debt security. Interest income on them is generated from two sources. On the one hand, fixed coupon bonds, like deposits, have an interest rate that is charged on the face value. On the other hand, bonds, like stocks, have a price that can change depending on market factors and the situation in the company. True, changes in the price of bonds are less significant than those of stocks.
The total yield of a bond includes the coupon yield and takes into account the purchase price. In practice, different profitability estimates are used for different purposes. Some of them show only the yield from the coupon, others additionally take into account the purchase and sale price, and others show the return on investment depending on the holding period - before sale on the market or before redemption by the issuer that issued the bond.
To make the right investment decisions, you need to understand what types of bond returns there are and what they show. There are three types of returns, the management of which turns an ordinary investor into a successful rentier. These are the current yield from interest on coupons, the yield on sale and the yield on securities to maturity.
What does the coupon rate indicate?Coupon rate is the base percentage of the bond's face value, also called coupon yield. The issuer announces this rate in advance and periodically pays it on time. The coupon period of most Russian bonds is six months or a quarter. An important nuance is that the coupon yield on the bond is accrued daily, and the investor will not lose it even if he sells the paper ahead of schedule.
If a bond purchase and sale transaction occurs within the coupon period, then the buyer pays the seller the amount of interest accumulated since the date of the last coupon payment. The amount of this interest is called the accumulated coupon income (ACY) and is added to the current market price of the bond. At the end of the coupon period, the buyer will receive the coupon in its entirety and thus compensate for its expenses associated with the compensation of the accrued income to the previous owner of the bond.
Exchange quotes for bonds from many brokers show the so-called net price of the bond, excluding the accrued income. However, when an investor orders a purchase, the NCD will be added to the net price, and the bond may suddenly be worth more than expected.
When comparing bond quotes in trading systems, online stores and applications of different brokers, find out what price they indicate: net or with accrued income. After this, estimate the final costs of purchasing from a particular brokerage company, taking into account all costs, and find out how much money will be written off from your account if you purchase securities.
Coupon yield
As the accumulated coupon yield (ACY) increases, the value of the bond increases. After the coupon is paid, the cost is reduced by the amount of the NKD.
NKD - accumulated coupon income
C (coupon) - amount of coupon payments for the year, in rubles
t (time) - number of days from the beginning of the coupon period
Example: an investor bought a bond with a par value of 1000 rubles with a semi-annual coupon rate of 8% per year, which means a payment of 80 rubles per year, the transaction took place on the 90th day of the coupon period. His additional payment to the previous owner: NKD = 80 * 90 / 365 = 19.7 ₽
Is the coupon yield the investor's interest?Not really. Each coupon period, the investor receives a certain amount of interest in relation to the face value of the bond to the account that he specified when concluding an agreement with the broker. However, the real interest that the investor receives on the invested funds depends on the purchase price of the bond.
If the purchase price was above or below par, the yield will differ from the base coupon rate set by the issuer in relation to the par value of the bond. The easiest way to estimate the real return on an investment is to compare the coupon rate with the purchase price of the bond using the current yield formula.
From the presented calculations using this formula, it can be seen that profitability and price are related to each other by inverse proportionality. An investor receives a lower yield to maturity than the coupon when he purchases a bond at a price higher than its face value.
C.Y.
C g (coupon) - coupon payments for the year, in rubles
P (price) - bond purchase price
Example: an investor bought a bond with a par value of 1000 rubles at a net price of 1050 rubles or 105% of the par value and a coupon rate of 8%, that is, 80 rubles per year. Current yield: CY = (80 / 1050) * 100% = 7.6% per annum.
Yields fell - prices rose. I'm not kidding?This is true. However, for novice investors who do not clearly understand the difference between yield to sale and yield to maturity, this is often a difficult point. If we consider bonds as a portfolio of investment assets, then its profitability for sale in the event of a rise in price, like shares, will, of course, increase. But the bond yield to maturity will change differently.
The thing is that a bond is a debt obligation, which can be compared with a deposit. In both cases, when purchasing a bond or placing money on deposit, the investor actually acquires the right to a stream of payments with a certain yield to maturity.
As you know, interest rates on deposits rise for new depositors when money depreciates due to inflation. Also, the yield to maturity of a bond always rises when its price falls. The opposite is also true: the yield to maturity falls when the price rises.
Beginners who evaluate the benefits of bonds based on comparisons with stocks may come to another erroneous conclusion. For example: when the price of a bond has increased, say, to 105% and has become more than the face value, then it is not profitable to buy it, because when the principal is repaid, only 100% will be returned.
In fact, it is not the price that is important, but the bond's yield - the key parameter for assessing its attractiveness. Market participants, when bidding for a bond, agree only on its yield. The bond price is a derivative of the yield. In effect, it adjusts the fixed coupon rate to the rate of return that the buyer and seller have agreed upon.
See how the yield and price of a bond are related in the video of the Khan Academy, an educational project created with money from Google and the Bill and Melinda Gates Foundation.
What will be the yield when selling the bond?The current yield shows the ratio of coupon payments to the market price of the bond. This indicator does not take into account the investor's income from changes in its price upon redemption or sale. To evaluate the financial result, you need to calculate a simple return, which includes a discount or premium to the nominal value when purchasing:
Y (yield) - simple yield to maturity/put
CY (current yield) - current yield, from coupon
N
P (price) - purchase price
t (time) - time from purchase to redemption/sale
365/t - multiplier for converting price changes into annual percentages.
Example 1: an investor purchased a two-year bond with a par value of 1000 rubles at a price of 1050 rubles with a coupon rate of 8% per annum and a current coupon yield of 7.6%. Simple yield to maturity: Y 1 = 7.6% + ((1000-1050)/1050) * 365/730 * 100% = 5.2% per annum
Example 2: the issuer’s rating was increased 90 days after purchasing the bond, after which the price of the security rose to 1,070 rubles, so the investor decided to sell it. In the formula, let's replace the par value of the bond with its sale price, and the term to maturity with the holding period. We get a simple return on sale: Y 2 7.6% + ((1070-1050)/1050) * 365/90 * 100% = 15.3% per annum
Example 3: The buyer of a bond sold by a previous investor paid 1,070 rubles for it - more than it cost 90 days ago. Since the price of the bond has increased, the simple yield to maturity for the new investor will no longer be 5.2%, but less: Y 3 = 7.5% + ((1000-1070)/1070) * 365/640 * 100% = 3 .7% per annum
In our example, the bond price increased by 1.9% over 90 days. In terms of annual yield, this already amounted to a serious increase in interest payments on the coupon - 7.72% per annum. With a relatively small change in price, bonds over a short period of time can show a sharp jump in profit for the investor.
After selling the bond, the investor may not receive the same 1.9% return for every three months within a year. However, yield, recalculated into annual percentages, is an important indicator characterizing the investor's current cash flow. With its help, you can make a decision on early sale of a bond.
Let's consider the opposite situation: as yields rise, the price of the bond decreases slightly. In this case, the investor may receive a loss upon early sale. However, the current yield from coupon payments, as can be seen in the above formula, will most likely cover this loss, and then the investor will still be in the black.
Bonds of reliable companies with a short period until maturity or redemption under an offer have the lowest risk of losing invested funds during early sale. Strong fluctuations in them can be observed, as a rule, only during periods of economic crisis. However, their market value recovers quite quickly as the economic situation improves or the maturity date approaches.
Transactions with more reliable bonds mean less risk for the investor, but the yield to maturity or put on them will be lower. This is a general rule for the relationship between risk and return, which also applies when buying and selling bonds.
How to get the maximum benefit from a sale?So, as the price rises, the bond's yield falls. Therefore, to get the maximum benefit from price increases when selling early, you need to choose bonds whose yields are likely to decline the most. Such dynamics, as a rule, are shown by securities of issuers that have the potential to improve their financial position and increase credit ratings.
Bonds with long maturities can also show large changes in yield and price. In other words, long bonds are more volatile. The thing is that long bonds generate a larger cash flow for investors, which has a greater impact on price changes. It is easiest to illustrate how this happens using the same deposits as an example.
Let's assume that a year ago a depositor placed money on a deposit at a rate of 10% per annum for three years. And now the bank accepts money for new deposits at 8%. If our depositor could assign the deposit, like a bond, to another investor, then the buyer would have to pay the difference of 2% for each remaining year of the deposit agreement. The additional payment in this case would be 2 g * 2% = 4% on top of the amount of money in the deposit. For a bond purchased under the same conditions, the price would increase to approximately 104% of the par value. The longer the term, the higher the additional payment for the bond.
Thus, an investor will receive more profit from selling bonds if he chooses long bonds with a fixed coupon when rates in the economy decline. If interest rates, on the contrary, rise, then holding long bonds becomes unprofitable. In this case, it is better to pay attention to securities with a fixed coupon that have a short maturity, or bonds with a floating rate.
What is the effective yield to maturity?The effective yield to maturity is the investor's total income from investments in bonds, taking into account the reinvestment of coupons at the rate of the initial investment. To assess the total yield to maturity of a bond or its redemption under an offer, a standard investment indicator is used - the internal cash flow rate of return. It shows the average annual return on investment, taking into account payments to the investor over different periods of time. In other words, this is the return on investment in bonds.
You can independently calculate the estimated effective profitability using a simplified formula. The calculation error will be tenths of a percent. The exact yield will be slightly higher if the purchase price exceeded the par value, and slightly less if it was below the par value.
YTM op (Yield to maturity) - yield to maturity, approximate
C g (coupon) - the amount of coupon payments for the year, in rubles
P (price) - current market price of the bond
N (nominal) - bond face value
t (time) - years to maturity
Example 1: an investor purchased a two-year bond with a par value of 1000 at a price of 1050 rubles with a coupon rate of 8% per annum. Estimated effective yield to maturity: YTM 1 = ((1000 – 1050)/(730/365) + 80) / (1000 + 1050) / 2 * 100% = 5.4% per annum
Example 2: the issuer’s rating was increased 90 days after purchasing the bond, and its price increased to 1,070 rubles, after which the investor decided to sell the bond. In the formula, let's replace the par value of the bond with its sale price, and the term to maturity with the holding period. Let's get the approximate effective yield for sale (horizon yield): HY 2 = ((1070 – 1050)/(90/365) + 80) / (1000 + 1050) / 2 * 100% = 15.7% per annum
Example 3: The buyer of a bond sold by a previous investor paid 1,070 rubles for it - more than it cost 90 days ago. Since the price of the bond has increased, the effective yield to maturity for the new investor will no longer be 5.4%, but less: YTM 3 = ((1000 – 1070)/(640/365) + 80) / (1000 + 1050) / 2 * 100% = 3.9% per annum
The easiest way to find out the effective yield to maturity on a specific bond is to use a bond calculator on the website Rusbonds.ru. An accurate calculation of the effective return can also be obtained using a financial calculator or the Excel program through the special function “internal rate of return" and its variations (XIRR). These calculators will calculate the effective rate of return using the formula below. It is calculated approximately using the method of automatic selection of numbers.
How to find out the yield of a bond, watch the video from the Higher School of Economics with Professor Nikolai Berzon.
The most important!
✔ The key parameter of a bond is its yield, the price is a derived parameter from the yield.
✔ When a bond's yield falls, its price rises. And vice versa: when yields rise, the price of the bond falls.
✔ You can compare comparable things. For example, the net price excluding accrued income is with the net price of the bond, and the full price with accrual income is with the full price. This comparison will help you make a decision when choosing a broker.
✔ Short one- and two-year bonds are more stable and less dependent on market fluctuations: investors can wait for the maturity date or repurchase by the issuer under an offer.
✔ Long bonds with a fixed coupon allow you to earn more by selling them when rates in the economy drop.
✔ A successful rentier can receive three types of income from bonds: from coupon payments, from changes in the market price upon sale, or from reimbursement of the face value upon redemption.
An intelligible dictionary of terms and definitions of the bond market. A reference base for Russian investors, depositors and rentiers.
Bond discount is a discount to the face value of the bond. A bond whose price is below par is said to be selling at a discount. This occurs if the seller and buyer of the bond have agreed on a higher rate of return than the coupon set by the issuer.
The coupon yield of bonds is the annual interest rate that the issuer pays for the use of borrowed funds raised from investors through the issue of securities. Coupon income is accrued daily and calculated at a rate based on the face value of the bond. The coupon rate can be constant, fixed or floating.
The coupon period of a bond is the period of time after which investors receive interest accrued on the face value of the security. The coupon period of most Russian bonds is a quarter or six months, less often - a month or a year.
Bond premium is an increase to the face value of the bond. A bond whose price is higher than its face value is said to sell at a premium. This occurs if the seller and buyer of the bond have agreed on a lower rate of return than the coupon set by the issuer.
Simple yield to maturity/put - is calculated as the sum of the current yield from the coupon and the yield from the discount or premium to the face value of the bond, as a percentage per annum. Simple yield shows an investor the return on an investment without reinvesting coupons.
Simple yield to sale - calculated as the sum of the current yield from the coupon and the yield from the discount or premium to the sale price of the bond, as a percentage per annum. Since this yield depends on the price of the bond at sale, it can differ greatly from the yield to maturity.
Current coupon yield is calculated by dividing the annual cash flow from coupons by the market price of the bond. If you use the purchase price of the bond, the resulting figure will show the investor the annual return on his cash flow from coupons on the investment.
The total price of the bond is the sum of the market price of the bond as a percentage of the face value and the accumulated coupon income (ACI). This is the price an investor will pay when purchasing the paper. The investor compensates for the costs of paying the NKD at the end of the coupon period, when he receives the coupon in full.
The bond's net price is the market price of the bond as a percentage of the face value, excluding the accumulated coupon income. It is this price that the investor sees in the trading terminal; it is used to calculate the return received by the investor on the invested funds.
Effective yield to redemption/put - the average annual yield on the initial investment in bonds, taking into account all payments to the investor over different periods of time, redemption of the par value and income from reinvestment of coupons at the rate of the initial investment. To calculate profitability, the investment formula for the rate of internal return on cash flow is used.
Effective yield on sale - the average annual return on the initial investment in bonds, taking into account all payments to the investor over different periods of time, proceeds from the sale and income from the reinvestment of coupons at the rate of the initial investment. The effective yield on sale shows the return on investment in bonds for a certain period.