We explain what bonds are, what they are for and the types of bonds that exist. Also, what is bond issuance and some examples.
What are the bonds (bonuses)?
In the financial area, bonds are called a type of debt instruments used by both private and governmental entities , and that are more or less equivalent to debt securities, or more easily said, are a kind of marketable notes to third parties.
Bonds exist to obtain funds from the financial market . They are issued by some financial entity and placed in the name of the bearer in the market or the stock exchange, where they are traded. The issuer of the bonds receives an amount of capital and undertakes to return it at the end of a fixed term, paying interest to the holder in a fixed or variable income.
This means that every bond also has an associated risk percentage : risk that market interest rates vary and alter the price of the debt security; risk that the issuer will be unable at the end of the term to return the borrowed capital; or risk that at the maturity of the bond, inflation has devalued the purchasing power of the currency so much that the return is imperceptible (there are no gains ).
The connoisseurs of the area talk about the maturity of a bond to refer to the time remaining for its maturity and for the capital to be repaid.
Types of bonds
There are the following types of bonuses, according to the game rules that determine them:
- Bonds simple . Those that allow the holder to contribute capital in a company and acquire part of its debt, receiving interest and collecting the capital invested at maturity.
- Government bonds . Those issued by a state institution for financing.
- Redeemable bonds . They can be exchanged for existing shares in the company or organization , instead of capital.
- Convertible bonds . They can be exchanged for newly issued shares, at a predetermined price, although yielding a lower return.
- Zero coupon bonds . It does not pay any interest during its maturity, but it pays everything at the end when it expires, accumulated. Its value is usually less than nominal.
- Cash bonuses . Issued by companies to pay cash needs, upon expiration they return the invested capital to the buyer.
- Bonds strips . Its name comes from the English Strip (“divide”), they allow to separate the value of the bond in each one of the payments that it generates, allowing to negotiate separately the money of the interests and the money of the capital.
- Perpetual debt bonds . They never expire, that is, they never return the invested capital, but they perpetually generate interest.
- Junk bonds . High risk and low rating securities, which reward the risk with high returns.
The issuance of bonds can be carried out by a private financial organization (companies, banks, etc.) or public (central banks, public companies, etc.), and it is usually of interest to the holders of capital that wish to preserve their assets against the inflation, or simply put them to produce income.
This is largely due to the fact that the bonds have a presumable flow of money , you can know the value they will present at the end of the term. However, bonds do not escape the dynamics of the stock market, and their operating rules are always defined in the contract signed between the issuer and the holder.
A couple of examples of bond financing are:
- Revenue bonds . In 2011, the US city of Chicago issued bonds under the title “City of Chicago – Chicago Midway Airport – Revenue Bonds – Series 2001A”, for a total amount of US $ 222,465.00. These bonds had a nominal value of US $ 5.00 and a nominal interest of 5.5% over a 30-year term. With the money raised in this way, the new terminals of the Midway airport were built, and the airport’s proceeds made it possible to pay the interest on the debt incurred.
- General obligation bonds . The county of Monterrey, belonging to the state of California, USA, issued in 2002 a series of bonds under the title Carmel Unified School District – Monterey County — California – General Obligation Bonds – Series 2002. With them a total of US $ was raised. $ 9,663,455.00 with a nominal value of US $ 5,000 and a nominal interest of 6%, payable at 30 years. With this money, the whole of the county’s schools was developed and renewed, given that its earnings were high and could pay the interest on the bond without any problem.