“The guarantees that a company gives for the safety of funds or for high profitability have little weight, because they disappear as soon as it ceases to exist”
Vladimir Savenok, “Rule of Wealth No. 1”
– I want to buy Eurobonds of Bank X, the yield is about 9% in foreign currency. What do you think?
- Which ones?
– I don’t know, my manager at the bank suggested. This is a reliable bank, why not take it?
- Let's see... is it okay that it does not have a maturity date (eternal), the company does not answer for it with its property, and the coupon is not fixed?
I have similar dialogues with investors very often.
Bonds are a reliable and uncomplicated instrument. But investors often lose money when investing in bonds. Why is this happening?
Before seriously considering a bond for purchase, especially for large sums for your portfolio, I suggest conducting a simple express analysis and checking not only the basic information about the security itself, but also the reliability of the issuer, because the main thing when buying a bond is that the issuer does not go bankrupt before its maturity date. repayment.
What are bonds
Bonds are the most conservative stock market instrument. They are often compared to a deposit and, perhaps, they are indeed similar. But the yield on bonds is always higher than what you can get on a bank deposit.
Bonds are debt securities that are issued to raise funds. From the issuer's point of view, taking out a bank loan will be more expensive than issuing securities.
When you buy a bond, you lend money to the issuer, and they pay you for using the money.
How Pricing Works in the Bond Market
The US bond market is like baseball - you need to understand and appreciate the rules and strategies, otherwise it will seem boring.
Another similarity to baseball is that its rules and pricing conventions have evolved and can sometimes seem a little esoteric.
The Official Rule Book of the Major Leagues took over 3,600 words to cover the rules regarding what a pitcher can and cannot do.
In this article, we'll look at bond market pricing conventions in less than 1,800 words.
We will briefly discuss bond market classifications, followed by return calculations, comparison criteria, and price spreads.
A basic understanding of these pricing conventions will make the bond market as exciting as the best World Cup baseball game.
How are bond yields determined?
The yield of a bond is determined by its main characteristics:
- Price. A distinction is made between the offering price, the market price and the redemption price.
- Timing, availability of offer, depreciation.
- A coupon is the same percentage that the issuer of securities pays you.
- Currency. The main bond trading takes place in rubles. However, on the stock exchange you can find Eurobonds that are traded in dollars and euros.
- Issuer.
All this information on each security can be easily found on the Rusbonds website of the Interfax group. It contains data on all types of Russian bonds, as well as information on foreign issues. The resource is in the public domain and can be used for free. To have full access to the information, you must register.
For each issue of securities there is a questionnaire (or card) that discloses complete information about this issue. There is an issue number, issuer, par value, issue volume, placement terms, coupon size, market price and yield to maturity, etc.
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.
(current yield) - current yield, from coupon
C
g (coupon) - coupon payments for the year, in rubles
P
(price) - bond purchase price
Example:
the 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.
Types of bond prices and how they are formed
Par value (placement price) – the amount at which the initial placement of bonds on the stock exchange takes place. Usually it is 1,000 rubles.
Market price is determined by supply and demand for a given security on the stock exchange. It can be higher or lower than nominal.
Very often, the price of a bond on the stock exchange is indicated as a percentage of the face value.
For example, the price of OFZ-29006-PK today is 106.207%, which means that in rubles the bond costs 1062.01.
If a bond is priced above par, it is said to be trading at a premium. If the current price is below par, then the bond is trading at a discount.
Redemption price – upon expiration of the validity period of the securities, redemption occurs at par value. However, for some bonds it is possible to carry out early repurchase (redemption) by the issuer under an offer.
An offer is an opportunity to repay a bond ahead of schedule. It can always be seen in the issuer’s card on websites with information about the bond. Often happens with floating coupon bonds.
For example, the maturity date is 2025, and the offer period is 2021. This means that you may not hold the paper until 2025, but present it for redemption in 2021.
How it works:
- A few days before the offer, the issuer sets a new coupon size. If the bondholder does not agree with the new yield, then the issuer is ready to repurchase its securities.
- Sometimes issuers, in order to encourage paperholders to sell, set the next coupon rate at 0.01%. And those who did not manage to submit an order to the broker for redemption will remain in securities with a yield of 0.01% until maturity.
- If you did not have time to get rid of the paper under the offer, you can sell it on the market. However, the price will already be below par, or hold it until maturity.
There are two types of offers:
Put offer - the issuer offers to buy back its securities from holders. Bondholders may or may not use it, and its terms cannot be changed. The issuer is obliged to repurchase all securities presented for repurchase.
Call – offer – the issuer will forcibly buy back its bonds, regardless of your consent.
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 is depreciation and how does it affect bond yields?
Amortization is the simultaneous payment of part of the bond body along with the coupon. That is, the par value of the bond will decrease, and hence the size of payments, while maintaining a constant coupon percentage. The amount of depreciation, if any, will be indicated on the paper card. It is quite difficult to calculate the final yield of securities with amortization due to the constantly changing face value.
For example, you bought a bond for a period of 3 years, a coupon of 8% is paid once a year, amortization is 30%, the face value is 1,000 rubles.
After a year, you receive the first payment = 80 (1000 * 8%) + 300 (1000 * 30%) = 380 rubles.
In total, the face value of the bond is now 1,000-300 = 700 rubles.
After another year you get 56 (coupon) + 210 (depreciation) = 266 rubles
The denomination is now 700-210 = 490 rubles.
Please note that the coupon size has not changed, it is still 8%, but the payments have become smaller because the face value of the paper is decreasing. Therefore, the yield on the paper will be much lower than 8%.
#5. Market agreements
There are certain agreements in the market that are used by all its participants.
When concluding transactions, these agreements are not even specified separately - this is a kind of general understanding. This also applies to bond prices. The price of a bond is essentially a percentage of the bond's face value. Let’s say the bond’s face value is one thousand or ten thousand rubles. If we ask the seller of a bond to name its price, he will name numbers, for example, 98, 100 or 105. These numbers are determined as a percentage of the bond's face value, that is, the price of a bond is a percentage of its face value. Thus, if we are told a price of less than one hundred, this means that the bond is trading at a discount (at a discount). If a bond is sold to us for one hundred, it means that it is sold at par value (Par Value). Well, if the price of a bond is above one hundred, it means it is trading at a premium.
Why can a bond be sold at a discount or premium? If the coupon rate is higher than prevailing market interest rates, then the bond is likely to sell at a premium because it is an opportunity for the bond buyer to earn a higher coupon income than other instruments available in the markets. Therefore, this opportunity is included in the price of the bond; upon purchase, the buyer pays more than the face value.
Same with discounting. If it turns out that the interest rate on the coupon is lower than the existing interest rates on the market, then the buyer will be offered a discount from the face value of the bond in order for him to buy this bond.
Convention on counting days
Another important market convention in the bond market is Day
count convention. Let's recall the formula for calculating the price of a bond and discuss what Day count convention is.
The price of a bond is equal to the sum of the discounted coupon payments plus the discounted par value of the bond. In a particular case, if we accrue coupon income more often than once a year, then since the rate rn is expressed in annual terms, a multiplier should appear. He will bring this rate to the frequency of accruals that is provided by the issuer of the bond.
Let's assume that accrual occurs quarterly, that is, four times a year. Then each bet rn must be multiplied by one fourth. It would seem that everything is simple, but it was not so. Depending on the market and the issuer, there is the concept of Day count convention
. It says that as a power multiplier you need to use the current number of days (for example, in a quarter or month) that have passed between coupon payments, divided by 360 or 365.
In the literature you can find the following expressions:
ACT/360 ACT/365
In addition, the notation ACT/ACT is found. Thus, if the coupon income is calculated monthly and the current month has 31 days, we should count as 31/365 (or 31/366 for a leap year). It is also convenient to use an agreement when, regardless of the month and year, the multiplier for calculating payments for discounting coupons is selected as 30/360.
Dirty and clean prices
Another market agreement is the bond price agreement. There is a concept of the so-called “ dirty
” and “
clean
” price of a bond. The net price of a bond is the price of the bond without accrued coupon income.
Let's graphically depict how the value of a bond changes. Let's say we have a bond, and after certain periods of time the coupon on it must be accrued. If we do not take into account coupon charges, then the price of the bond changes something like this:
However, due to the fact that there is a coupon income that becomes larger and larger every day in the period, this coupon income will be accrued, paid and reset at the end of each coupon period.
If we add these two graphs, we see that the bond price changes something like this:
When we look at some information terminal, or someone offers us a bond at some price, it is always offered to us at the net price (the dotted line). This happens because it is convenient - by looking at the price, we better understand the relationship between price and interest rates and may not take into account the accumulated coupon income. At the same time, when the purchase of a bond is settled, the dirty price of the bond is always paid (the net price that was quoted, plus the interest income that had accumulated at that time).
Therefore, if you buy a bond at a net price of 90, you must also have the funds to pay the seller a premium in the form of coupon income on that bond.
These are probably all the main points you should know when we talk about bond prices and how they are quoted and calculated.
What influences bond prices? As mentioned earlier, the relationship between the price of a bond and interest rates in the market is inversely proportional. Bond prices are also affected by the time remaining until maturity. Let's illustrate this schematically.
Let's say we had three bonds. One was trading at par, another was trading at some premium, and the third bond was trading at a discount. Let's assume that all three bonds had the same maturity - five years. The price of these bonds will vary depending on the time to maturity:
P is the price and T is the time remaining until maturity. Bonds that sell at a premium fall in value to their par value as they approach maturity. Bonds that are sold at a discount increase in price to their par value as they approach maturity. The value of a bond sold at par does not depend on the remaining time to maturity.
Please note that this only applies to price versus time to maturity. The value of a bond can be influenced by a number of other factors, for example, changes in interest rates on the market, which have their own separate impact (when interest rates rise, the price of the bond decreases; when interest rates decrease, the price of the bond increases).
What is duration
In the world of bonds, there is another concept that frightens novice investors: duration - the period for full repayment of the funds spent on the purchase of bonds.
This value is often used to compare different bond issues and is measured in days (sometimes in years).
Let's look at a simple example:
You bought a bond worth 1000 rubles for a period of 10 years, with a coupon rate of 20% per annum.
At the same time, the duration, that is, the period after which the invested 1,000 rubles will be returned to you, is 5 years (20% * 5 years = 100%).
The shorter the duration, the less risk the investor has.
Why do investors choose bonds?
In the financial sector, bonds are usually called securities that are a type of debt obligations of the company that issued them (the issuer), taken out for a certain period, which is called the maturity date. During this period, the issuer pays the owner of the securities a certain income, and at the end of the maturity period transfers their nominal value. As a rule, the yield to maturity of bonds exceeds the bank deposit rate, even if their issuer is the same bank.
Bonds are necessary for the issuer to receive additional funds, and for buyers they serve as a reliable tool for preserving their savings and even receiving a small but stable income. The main indicators for them are:
- par value
- the amount that the owner will receive after redemption; - market price
- the amount that the buyer pays to the seller; - issue price
- the amount at which the issuer places its bonds on the stock exchange; - circulation period
- the period during which the buyer will not be able to withdraw his funds from the issuer; - coupon
- the rate of return that the issuer pays to holders (there are also zero-coupon bonds, the income on which is paid one-time at the time of redemption); - frequency of payments
is set arbitrarily by the issuer, the most common frequency is once every six months or once a year; - profitability
- the amount of income received by the holder; - duration
- the period of full return of the funds invested in the purchase, expressed in days.
Next, we will consider the influence of these parameters on the value of bonds over different periods of time.
Types of bonds by issuer
- State. They have large price fluctuations based on external news and are a kind of indicator of economic stability in the country. Issued by the state to cover budget deficits. Government securities are OFZ - federal loan bonds. More details about them in our article.
- Municipal – city and regional (territorial). The yield on them will be a couple of percent higher than on OFZ. However, some securities will have very low liquidity. They are difficult to buy, since there are no offers in the glass, and they cannot be sold quickly.
- Corporate. The most profitable, however, you should carefully study the issuer. It could be Gazprom, then you understand the reliability of the papers. Or maybe a company that does not have a credit rating. For example, Legion SK-BO-01 has a coupon of 14% per annum, but few people even know what kind of company it is and whether it will repay the debt. This group includes VDOs and “junk” bonds - securities that do not have a credit rating and with a high risk of non-payment of debts.
There are Eurobonds on the stock market. These are securities denominated in the currency of another country. Most often these are dollars. The yield on them is clearly ahead of bank deposits, for example, Eurobonds VEB.RF-001R-03 with a coupon of 4.9% in dollars. This is a highly reliable instrument, as issuers are carefully selected.
How to earn more?
With bonds you can get higher income, which, however, is associated with certain risks. To earn more, you will have to “loan” not to the state, but to companies. In this case, the investor needs to buy corporate securities.
Bonds of reliable companies
Let's look at a particular example: compare the yields of bonds of the large American company Apple (issuer credit rating Aa1) and US government bonds.
Bonds of unreliable companies
Let's look at the bonds of the famous cosmetics company Avon (issuer credit rating B1) and the bonds of Apple and compare their yields.
Of course, such a return seems attractive, but not to an investor who is aware of the risks that are inextricably linked with such impressive percentages. You can track the volatility of the bonds of both companies using these charts:
Apple Company
Avon company
The decline in the price of Apple bonds is associated with a gradual increase in interest rates. Fluctuations are justified by external factors, plus a high credit rating (we will discuss this concept below) can give confidence in the fulfillment of the company’s obligations to investors.
Avon's yield curve looks different and exhibits significant and unpredictable changes in value. This may indicate internal problems of the company. Despite promises of high returns, the risks of a company's bankruptcy increase over time, which means holders of its bonds risk losing their investments.
Even a well-known brand cannot serve as a guarantee of reliability for an investor. Perhaps the company has internal problems. If you want to understand this quite simply, you need to familiarize yourself with the balance sheet. The numbers can be quite telling.
Thus, at Avon the difference between assets and liabilities confirms our fears. Such bonds can be included in the risky part of the investment portfolio to increase its profitability, but to reduce risks - take into account the time factor by buying bonds for a short term.
Bonds also differ in the form of payments
The main type is coupon bonds, payments on which are made in the form of coupons. But the income on discount bonds is formed due to price increases. At the same time, the securities themselves are traded on the stock exchange much cheaper than their face value.
Example of discount bonds:
The issuer issues a bond on the stock exchange at a price of 900 rubles with a par value of 1000 rubles, which means that on the maturity date the bonds will be repurchased at 1000 rubles.
The income will be 100 rubles (1000-900) or 11.11% (100/900)
A coupon is a regular payment that the paper holder will receive.
Coupons differ in payment frequency (month, quarter, 6 months, year) and type.
High-risk, high-yield bonds may pay a coupon every month. Most issuers pay the coupon 2-4 times a year.
The types of coupons are:
- Constant – the same percentage is charged each time. For example, Sberbank-001-03R bonds have a constant coupon with an annual rate of 8%.
- Fixed – all coupons are known in advance, but their sizes are different (not constant). An example of such securities is Rostelecom-1-bob bonds. The coupon changes from 11.7% in 2015 to 7% in 2025, but it is immediately registered (fixed) and known.
- Floating. Most of these bonds are linked to RUONIA. This is the rate at which Russian banks issue loans to each other for 1 day. Often the floating rate exceeds the average value of this index by 1-2 percentage points. For example, OFZ-29011-PK have a floating coupon equal to the arithmetic average of RUONIA rates over the last 6 months, increased by 0.9 percentage points.
If there is a floating coupon, it is important to monitor the offer date, since the issuer, in order to stimulate the presentation of securities for redemption, may announce the next coupon to be very low (for example, 0.01%).
What is accumulated coupon income (calculation example)
Accumulated coupon income (ACY) is part of the income accumulated during the period of ownership of the bond. That is, how many days you owned the securities, this is the profitability you will receive. This is the main advantage of bonds over a bank deposit: when selling securities early, you do not lose interest accrued during ownership.
This amount will not appear on your account, but will appear when you purchase (or sell) the bond on the exchange.
If you buy a bond not at the time of its placement, then upon purchase you will pay the seller not only the market price, but also the proportional coupon amount (PAC) accumulated by that time.
At the moment when the issuer redeems the next coupon, the NKD amount is reset to zero and begins to accumulate again until the next payment.
Of course, you can calculate the amount of tax accrual yourself, but there are a lot of services that make it possible to get a ready-made figure. On Rusbonds, in the issuer’s card there is a line “NKD” where the current value is indicated.
How does settlement occur at the time of making a transaction on the stock exchange?
Let's look at an example:
- You want to buy a bond, the cost of which is 96% and the income tax is 30 rubles, which means you will pay for it = 960 + 30 = 990 rubles.
- You want to sell a bond. The price on the exchange is 102%, NKD is 30 rubles, which means the selling price (the one you receive from the buyer) = 1020 + 30 = 1050 rubles.
When concluding a transaction, the final cost will be displayed in the “glass”, taking into account the accrued income!
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 (ACI) 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.
Methods for calculating bond yields (examples)
An investor’s income from owning bonds consists of several components:
- coupon payments
- increase in the value of securities
- additional income (tax deductions, etc.)
Remember that a bond's coupon is not equal to its ultimate yield.
Bond yields can be calculated in several ways:
Simple yield (nominal, coupon)
The income that the owner of a bond will receive by purchasing it at par price. That is, this is the percentage that the issuer must pay. Here the percentage received does not take into account reinvestment.
It is calculated as the ratio of all coupons paid for the year to the nominal value, expressed as a percentage.
For example, an issuer issues bonds with a coupon of 35 rubles every six months, then the coupon yield = ((35+35)/1000)*100% = 7% annual coupon yield.
Current yield
This is the yield for the current coupon period (usually considered annual), based on the purchase price of the bond on the market.
Calculated using the formula = (annual coupon/bond purchase price)*100%.
For example, if the amount of annual coupon payments on a bond is 75 rubles, the market price of the security corresponds to the par value, then the current yield = (75/1000) * 100% = 7.5%
If the market price of the security was below par, for example 980 rubles, then the current yield will be =(75/980)*100% = 7.65%
"Modified" current yield
This is the profitability taking into account the income tax.
It is calculated as the ratio of the annual coupon to the purchase price of the bond, taking into account the income tax.
For example:
Bond purchase price 980 rubles, cash flow 30 rubles, annual coupon 80 rubles
Modified current yield will be (80/(980+30))*100 = 7.92%
The purchase price taking into account the tax accrual is also called “ dirty”
» price.
Accordingly, without NKD – “ clean
”.
Yield to maturity
This indicator allows you to calculate the profitability for a specific holding period, provided that you were the owner of the securities until maturity. This means that you receive the face value of the bond along with the last coupon.
For example:
A bond is traded on the stock exchange at a price of 1002 rubles, the amount of coupons is 96 rubles, for a period of 420 days.
Yield to maturity ((1000-1002)+96)/1002 * (365/420)*100 = 8.15%.
Most often, the yield for each security during the holding period is known. In this case, to compare different bonds all result in a single annual yield.
For example:
The first bond gives a profit of 5%, and the second 15%.
But the period until maturity of the first is 182 days, and the second is 547. Let's calculate which securities have the highest income?
To do this, the profitability must be converted to annual:
0,05 * 365/182 = 10%
0,15 * 365/547 = 10%
That is, the annual yield of these securities is the same.
Effective yield to maturity
How much interest will you earn if you reinvest the coupons you receive in the same bonds (with the same yield) throughout the term. If coupons are not permanent, then this value may be calculated incorrectly by services, because they focus on the size of the last coupon without taking into account the fact that it will change. On the Moscow Exchange website and many trading terminals, this type of profitability is indicated by default. Only experienced investors can calculate it themselves; it is much easier to use ready-made data. And coupons are not always reinvested.
Some sites have special calculators that allow you to calculate bond yields, for example on the Rusbonds website.
Bond as an investment instrument
A bond is inherently a fixed income security. Thus, their purchase creates an obligation on the issuer to reimburse the buyer for the predetermined price of the bond, as well as a fixed percentage of this value within a specified time frame.
Based on this, the following criteria can be identified that determine the profitability of securities:
- par price of the bond;
- market price of securities;
- interest rate;
- established loan repayment period;
There are the following methods for paying bond income:
- fixed interest rate;
- stepped interest rate;
- floating interest rate;
- indexing of nominal value;
- discount when purchasing securities;
- profitable loans.
Numerically, the yield of a bond will be a percentage ratio of the cost of its purchase to the amount of profit received after the expiration of the agreement on obligations between the buyer and the borrower on this bond.
The yield on a purchased bond is usually presented in the form of three indicators:
- coupon yield - the interest rate on a given security;
- current yield - the ratio of the interest rate to the purchase price;
- total return - takes into account all income factors.
Basic terms
Income from bonds can be obtained by so-called stripping of coupons from it.
Coupons are a separate part of bonds with a certain denomination and payment period. The coupon is separated when interest on the bond is paid by the bank.
A coupon bond involves interim payments that do not reduce the value of the bond initially established.
Coupon rate is the rate paid to the owner of a bond for each period (usually a year) of holding the bond.
Another way is discounted income from bonds.
Interesting: Eurobonds (Eurobonds): what is it in simple words
Discount - premium when buying a bond. Numerically, it represents the difference between the stated price of a bond and the actual cost of purchasing it.
The difference between the market and nominal price of a bond can arise for several reasons:
- changes in interest rates on loans;
- change in the market situation of the borrower.
What bond yields can you expect in 2019-2020?
OFZs are the most reliable bonds, but the least profitable. At the beginning of the year, they could earn an average of 8%. Now coupon rates have dropped to 7% or lower - this is the minimum since 2013. However, this is more than a deposit in a bank, where average rates are below 6 percentage points, can bring.
Municipal securities will bring a higher yield by a couple of percent. The risk of issuer bankruptcy remains at a minimal level. But such bonds often include depreciation.
Corporate bonds. Rates vary greatly and depend on the risk taken by the investor. Blue chip bonds are more reliable, but bring lower returns compared to securities of issuers from the second and third tier.
First level securities will bring on average 7-9%, second level 9-11%, and third level up to 12-13%.
Of course, there are high-yield bonds (HYBs) that have a yield of 15-20%, but you must at the same time accept a very significant risk of bankruptcy of the issuer. By the way, the list of defaults can also be viewed on websites, for example here. The expected return on them is amazing.
Eurobonds of the Ministry of Finance have a yield of 2-3% in dollars, despite the fact that today foreign currency deposits in dollars can be opened in a bank at 1%, and euro 0.01%, and even then you will have to look.
But corporate Eurobonds can bring 9-10% per annum in dollars. For example, Tinkoff Bank Eurobonds today have a coupon rate of 9.25% per annum.
Considering that the refinancing rate will continue to be reduced by our Central Bank, most likely the yield by the end of 2021 will be 1-2% lower than now. But do not forget that the return on deposits will also be less than today.
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.
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 .
Factors that determine bond yields
- The size of the Central Bank key rate. When the key rate decreases, bonds that have been circulating on the market for a long time rise in price, and their yield decreases.
- Market price of the bond. As the price of outstanding issues decreases, their yield increases for new owners.
- Inflation rate. High inflation reduces the profitability of any financial instruments.
- Maturity date. For each bond, it is known when it is issued (with the exception of “perpetual” bonds). Typically, long-term bonds have higher yields than short-term ones. As the maturity date approaches, the bond's value always approaches its par value. Prices for short bonds are more stable and are not affected by market fluctuations. The further away the maturity date, the greater the possible fluctuations in the price of the security. Therefore, when there is a high level of uncertainty in the market, you should buy short bonds.
- Reliability of the issuer. Reliable issuers have lower coupon rates than issuers with low credit ratings, which must attract investors' attention with high rates. For bond buyers, high rates are a price to pay for risk. Most often, reliability is determined by the level of credit rating assigned by rating agencies (Fitch, Moody's, ACRA, etc.).
- General situation on the market. For example, the introduction of restrictions against Russian government debt will cause an outflow of foreign capital from the Russian Federation, and accordingly, a decrease in the value of OFZ. The sharpest drops in the bond market were in 2015 (sanctions over Crimea) and 2018 (anticipation of the introduction of new sanctions).
- Broker commissions. Careful selection of a broker for investing with minimal commissions will allow you not to lose the profitability received. To work with bonds, when you simply buy an instrument and keep it in your portfolio (and the number of transactions you have per month is minimal), look at brokers without a mandatory monthly commission and minimal tariffs for purchases, for example, Sberbank.
- Taxes paid. On the income received, we pay personal income tax at a rate of 13%. The tax code also applies to bond transactions, thereby reducing yields. Knowing the intricacies of taxation of this stock market instrument, you can optimize tax expenses.
Subtleties of bond taxation
Profit received as the difference between the purchase and sale prices of securities is taxed at a rate of 13% (non-residents pay 30%).
Moreover, the tax is taken precisely in the case of the sale of paper. If you hold the bond until maturity, there will be no tax.
For example:
You bought a bond for 980 rubles, and then sold it for 1000. In this case, tax will be withheld in the amount of (1000-980) * 13% = 2.6 rubles.
If you hold this bond until maturity, then having received the same profit of 20 rubles, you will no longer pay tax.
Income from the difference between the sale and purchase prices of securities will not be taxed if the bonds were purchased after 01/01/2014 and have been in your possession for more than 3 years. An investment tax deduction is applied to them (except for securities on IIS). To receive this deduction, you must write a corresponding application.
Income from the sale of Eurobonds is calculated as the difference between the purchase price and the sale (or redemption) price, recalculated at the Central Bank exchange rate for the corresponding dates.
If the dollar exchange rate increases, you will have to pay tax on the exchange rate difference in value.
For Eurobonds of the Ministry of Finance, one exchange rate is used in calculations - on the date of sale (redemption), thus the investor is exempt from tax on exchange rate differences. The coupon tax on Eurobonds of the Ministry of Finance is also exempt from personal income tax.
The coupon tax is 13%, except in the following cases:
- state and municipal securities are exempt from paying coupon tax,
- corporate securities issued after 01/01/2017 are exempt from tax if the coupon rate is no more than 5% higher than the key one. Everything above is taxed at a rate of 35%.
The key rate of the Central Bank of the Russian Federation today is 6%.
Let's look at an example:
The bond was purchased at par and has a coupon of 15%.
The tax base calculation will look like this:
1,000 *15% – 1,000 * (6%+5%) = 150-110 = 40 rubles.
Personal income tax = 40*35% = 14 rubles.
As a rule, coupon income is transferred to the brokerage account already cleared of tax.
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 reverse 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 price of a bond is a derivative of its 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.
Which bonds to pay attention to today
Bashneft 001P-02R-bob – permanent coupon 9.5%, maturity in December 2023, yield to maturity 9.05%
Bashneft-3-bob – variable coupon, maturity in May 2025, yield to maturity 11.9%
PIK BO-P03 – permanent coupon 10.75%, maturity in July 2022, yield 7.9%
LSR BO 1R-03 – permanent coupon 9%, amortization from September 2021, yield to maturity 8.2%
OKEY 001Р-01 – permanent coupon 9.55%, maturity in April 2021, yield 7.9%,
Kamaz BO-P01 – permanent coupon 9%, depreciation from February 2020, yield 7.4
These are fairly large issuers, so the risk of bankruptcy is minimal.
Criteria for comparing bonds
Most bonds are priced relative to some benchmark. This is where bond market pricing gets a little tricky to understand.
The different classifications of bonds, the definitions of which are given above, use different pricing criteria (benchmarks).
Some of the most common price benchmarks are current U.S. Treasuries (the most recent series).
Many bonds are priced relative to specific Treasuries.
For example, a ten-year Treasury bond could be used as a benchmark for ten-year corporate bonds.
When a bond's maturity cannot be accurately determined due to call or put features, the bond is often priced using a benchmark curve.
This is because the expected maturity of a put-back bond is likely not exactly the same as the maturity date of a particular Treasury note.
Benchmark rate curves are constructed using yields on underlying securities with maturities ranging from three months to 30 years.
Several different benchmark interest rates or securities are used to construct benchmark pricing curves.
Because there are gaps in the maturities used to construct the security curve, returns must be interpolated between observed returns.
For example, one of the most commonly used benchmark curves is the U.S. Treasury current curve, constructed using the most recently issued U.S. Treasury bonds, mortgages, and bills.
Because securities are issued by the U.S. Treasury only in three-month, six-month, two-year, three-year, five-year, ten-year, and thirty-year maturities, the yields on theoretical maturities must be interpolated.
This Treasury curve is also known among bond market participants as the interpolated yield curve (or I-curve).
Other Popular Bond Pricing Curves
- Treasury Spot Rate Curve: A curve constructed using theoretical spot rates on U.S. Treasury bonds.
- Swap Curve: A curve constructed using a fixed interest rate in interest rate swaps.
- Euro-Dollar Curve: A curve constructed using interest rates derived from the price of Euro-Dollar futures.
- Agency Curve: A curve constructed using the yield on agency fixed-rate, non-buyable debt.
How to increase bond yields
- Buy securities issued after 01/01/2017.
- Keep bonds in your portfolio for more than 3 years.
- Open an IIS and buy papers for it. This method allows you to significantly increase your profitability by providing a tax deduction in the amount of 13% of contributions to the account (subject to the presence of personal income tax paid to the budget for this amount) or exemption from income taxation.
- If, when closing an IIS, you do not sell the securities, but first transfer them to a regular brokerage account, then you can apply an investment tax deduction to them for securities that you have owned for more than 3 years.
Kinds
For debt securities on the exchange market, there are two most important prices for investors:
- Nominal (common noun);
- Market (otherwise called exchange rate).
However, this is not all: you can come across the issue, primary, discount (reduced), redemption, clean and dirty cost of paper. We’ll figure out what all this means now.
Nominal
The par value of a bond is the price at which the issuer agrees to redeem the security on the date specified in the prospectus. This is the base cost from which all other types of prices are calculated.
Typically, the nominal price of bonds on the Russian market is 1000 rubles. But some issuers issue bonds with denominations of 500 and 700 rubles, 10 thousand, 50 thousand, 100 thousand, 1 million or even 25 million rubles. It all depends on the purpose of placement. But the most popular securities, including federal loan bonds, have a face value of 1,000 rubles.
If we talk about Eurobonds, then usually the nominal price is 100,000 - 200,000 units of currency. The face value is necessarily announced when placing a bond, and investors are guided by it when buying and selling. It will be paid when the bond is redeemed, regardless of what price the investor bought the paper for.
For example, if an investor purchased a bond for 900 rubles with a par value of 1000, then upon redemption he will earn 100 rubles. If the purchase cost 1,100 rubles with the same denomination, then the investor lost 100 rubles.
Emission
This is the initial listing price. Typically, issuers, in order to spur investor interest, set a discount at the first sale - that is, they sell the bond below par. Due to this, a price “acceleration” is formed.
But in some cases, a bond may immediately be sold at a higher price than its face value, that is, no longer at a discount, but at a premium. This usually happens if the bond's coupon yield is very attractive and the placement is from a reputable issuer.
On the secondary market
After the bond is issued and the initial auction is successful for the “chosen few,” it enters the secondary market. Here, ordinary investors can already buy it, without making additional efforts, using their trading terminal or a phone call to the broker.
Market price
So, the market value of a bond is the price at which the paper is sold on the secondary market after the primary auction . The market price is expressed as a percentage of the nominal price. For example, if it is equal to 103%, and the face value is 1000 rubles, then you will have to pay 1030 rubles for such a bond. It also happens that it is below par, for example, 97%. Usually they say that this is a discounted or discounted price. In this case, paper can be bought cheaper, for 970 rubles, respectively.
In contrast to the strictly defined initially: prices at par, issue value and redemption price, the market value of a bond is as changeable as the weather in England.
It is determined by the state of affairs that has developed in the market for these assets and in the financial space in general at the time of sale.
The “temperature” of prices on the stock exchange during trading changes depending on the following “atmospheric” influences:
- demand (how many buyers want to acquire assets);
- offers on the market (there may be more profitable ones);
- the period remaining until maturity;
- interest rate level;
- opportunities to receive regular fixed income from the bond;
- existing risks
Why does the market price of a bond change?
The market value of a bond depends on two factors:
- demand - the more people want to buy a bond, the more expensive it will be sold by current holders;
- offers - if there are many sellers, they will push the price down.
Supply and demand depend on the following points:
- risk - if the issuer is reliable, then the price of the bond will rise, if any problems arise, then everyone will start selling the paper;
- maturity - the fewer days remain until the bond's par value is paid, the closer the market price will be to the initial one;
- liquidity - if there are few orders from buyers and sellers, then the price will move in jerks;
- news background;
- profitability - the higher it is, the greater the demand.
A bond's yield is usually either fixed or dependent on some indicator, such as the rate of inflation. In the case of bonds with a constant coupon, the following pattern works:
- if the Central Bank raises the key rate, then the value of the bond falls;
- If the Central Bank lowers the rate, then bond prices rise.
Let's say there is a bond with a par value of 1000 rubles and a constant yield of 7% per annum. Currently, the key rate of the Central Bank of the Russian Federation is set at 7.75%. Such paper is slightly less profitable than deposits, therefore, other things being equal, it is traded below par value - by about 0.75%, i.e. for 99.25% of face value.
Let's imagine that the Central Bank of the Russian Federation has set the key rate at 4%. The bond becomes more profitable than deposits, and people are more willing to buy it. The market value of the bond increases until the yield becomes equal to 4% - that is, to approximately 103% of the face value. Then the Central Bank of the Russian Federation sharply increases the rate to 10%. Now a deposit is more profitable than a bond. Investors are starting to sell it. The market value drops to 97% of the face value, so that the final yield becomes equal to 10% (7% - coupon + 3% - the difference between the market price and the face value).
Of course, this is a relative example, and there are many factors influencing the cost of a bond, but the general principle is this. As you can see, the market price is strongly tied to the nominal price, but changes relative to it in response to news.
If the bond has a variable or floating coupon, then its price will fluctuate slightly, since the size of the payment will be adjusted depending on the economic situation.
Advantages and risks of working with bonds
Advantages of bonds:
- reliability
- the yield is higher than on a deposit
- there are ways to increase income
- When selling securities ahead of schedule, the income received during ownership is not lost. Unlike a deposit, where closing ahead of schedule will lead to loss of profitability.
Bond risks:
- Market. Under the influence of macro- and microeconomic factors (inflation in the country, in the world, changes in the Central Bank rate, etc.), security prices may change. Long-term (10-15 year) bonds are especially susceptible to price changes.
- Geopolitical. A careless tweet from Mr. Trump, as we have seen more than once, can bring down the markets in a few hours. In addition, any looming military conflict leads to decreased stability in the markets. In such situations, investors prefer to “shift” to protective assets: gold and OFZ.
- Liquidity risk. For some securities (usually VDO), it happens that the order book is empty, that is, if necessary, it will not be possible to quickly sell or buy the instrument.
- Currency risks. Typical for Eurobonds. A sharp change in the dollar exchange rate will significantly affect the investor's profitability.
- Credit risks are the risks of issuer default and various delays in payments.
Always remember, the higher the coupon rate, the higher the risk of bankruptcy of the issuer.
Early repayment of bonds
The right to early redemption (call) of bonds provides the issuer with the opportunity to withdraw the securities it has issued from circulation before the agreed date. This right must be established at the time the bonds are issued.
Also, there are bonds on the market, the sale of which does not imply the possibility of its withdrawal. The purchase of such securities significantly reduces the risks associated with the investment, but at the same time, the yield from such bonds is usually much lower.
Interesting: Eurobonds (Eurobonds): what is it in simple words
If the company wants to call its bonds, it undertakes to pay the buyers the original cost of these securities, as well as a premium in the amount of annual interest.
Cases when an issuer calls back its bonds are not uncommon. In an environment of constantly changing interest rates, the savings on reissuing bonds can amount to millions of dollars.
In addition to the fixed premium, which is paid by the issuer when the bond is called, there is also a break-even premium. This premium is calculated as follows: the sum of the premium and the face value, reinvested at the time of call with the same duration as the period remaining until the maturity date, will give a yield equal to the yield to maturity of this bond at the time of its call.
The compensations and bonuses provided in this way are intended to provide safe conditions for investing.
Early repayment restrictions
If the bonds are called, their issuance will be limited until all investors have been compensated.
It is worth clarifying that in the issue of early repayment of bonds there are two concepts that, as a rule, mean the same thing, but for a more detailed understanding, they should be clearly separated. We are talking about a “ban on revocation” and a “ban on refinancing.”
Refinancing is one of the possible options for compensating the investor, which involves trading one coupon interest rate for another (usually a lower one). Thus, a prohibition on refinancing, if specified in the terms of an agreement to invest in securities, is not a prohibition on withdrawal. Confusion in these terms is common, and therefore understanding this issue will allow you to avoid unprofitable transactions.
Services for working with bonds
We have selected for you several convenient services for working with bonds:
Moscow Exchange - convenient sorting of bonds depending on specified parameters - type of paper, type of coupon, frequency of coupon payments, availability of amortization, terms, available on the Moscow Exchange website.
Rusbonds – the coupon size is not visible in the general table, but the card of each security contains the most complete information.
Cbonds – complete information not only on Russian but also foreign issuers, but subscription is paid.
Blackterminal – for each bond there is a detailed calculation of the yield with a “hands-on” explanation of what was multiplied by what to get the result.
Well, don’t forget about the QUIK terminal. It also contains comprehensive information on all papers.
#4. Bonds
A bond is a financial instrument that pays interest on a predetermined amount at predetermined periods of time.
Let's consider what the structure of payments on bonds will look like. Let's say we have a three-year bond. When purchasing a bond, the buyer must make a payment equal to the face value of the bond. Let in our example the nominal value of bond N be 100 rubles. Bond coupon payments will be made regularly. The coupon payment is measured as a percentage. Let's assume it's five percent (C=5%). At the end of the bond's life (at maturity), the holder receives back the face value and the final coupon payment.
Coupon payments, as shown in the figure, occur annually. In principle, the bond issuer can specify any payment frequency, such as quarterly or semi-annually.
Zero coupon bonds
There is also a type of bond for which no coupon is paid at all - a
zero-coupon bond. Such a bond is purchased at a discount from its face value (discount). The face value of this bond is paid at maturity, and at the beginning the buyer pays some amount that is less than the face value. The profit on such a bond will be the difference between the purchase price of the bond and the face value of this bond. Suppose its face value is one hundred rubles N=100, and the discount on this bond is five percent d=5%, repayment in a year. According to the discount formula, the current value of the bond will be equal to the par value discounted at this rate of five percent.
PV=N/(1+d)=100/1.05=95.24 rub.
This is an example of calculating the fair price of the simplest bond. It should be noted that if a zero-coupon bond with a term of one year was issued not today, but, say, six months ago, and we want to buy it, the price of the bond will be higher. Because due to the fact that six months have already passed, we will discount at a lower interest rate, and, accordingly, the bond will cost more.
The duration of bonds is called maturity
. At the moment of maturity (payment of par value), the value of the bond will be equal to its par value, in our example - one hundred rubles.
Coupon bond price
Let's try to calculate the price of a coupon bond.
The calculation method will be very similar to the calculation of a zero-coupon bond. Let us remember what was said earlier about discounting: in order to find out the cost of a bond, we need to bring each coupon payment to the current point in time and sum up the payments. Let's write this down. PV=C/(1+r1) + C/(1+r2)2 + (C+F)/(1+r3)3
The price of the bond will consist of three parts: the first coupon, discounted at the interest rate for one year, plus the second coupon, discounted at the interest rate for two years, and plus the last coupon, plus the par, or face value of the bond, discounted at the interest rate for three years of the year.
Let's consider what the formula for calculating the price of a bond will look like if the number of interest periods is not three, but more. In general, we will get the sum of discounted coupon income for a value of n from one to T (the number of periods) plus the last payment of the face value of our bond, discounted at the rate that is valid for the time period T.
As you can see, it is not necessary to memorize the calculation formula; it can easily be derived from general considerations regarding the structure of payments for a given product.
Yield to maturity
One of the important indicators of a bond as an instrument is the concept of yield to maturity
(Yield to Maturity). This is the single interest rate of return on the bond that the holder will receive if he holds the bond until maturity, that is, waits for all coupons and par to be paid at the end (rather than selling it in the middle). How to determine this profitability?
For a zero-coupon bond, everything is quite simple - the discount rate at which we buy our bond will be the yield to maturity. In our example, if purchased at a discount of five percent, the yield on the bond will be five percent. What about a coupon bond? The point is that each coupon is discounted at its own rate. For now, we will omit how these rates are calculated (they are calculated based on the current prices of the instruments). To find out the yield of a bond to maturity, knowing the current price of the bond, we need to substitute a single rate instead of the interest rates at which we discount. By solving the equation of the nth degree, you can determine the size of this very profitability.
It is also worth noting that an important factor influencing the price of a bond is interest rates. If we hold a bond until maturity, then changes in interest rates do not affect us in any way, because we do not care how the current price of the bond changes, we hold it for the sake of the coupon income. If we want to sell a bond during its validity period, then it is important to understand that changes in interest rates lead to changes in the price of the bond.
So, if we bought a bond today for one hundred rubles, then if interest rates rise, the price of the bond will change, the bond will cost less. Changes in interest rates and bond prices are inverse - if interest rates rise, the bond price decreases, and vice versa (if interest rates decrease, the bond price rises).
A little history
When do you think the bond first appeared? To be honest, when I first learned about this financial instrument, I thought that it was something that was invented in the 19th century for trading on American exchanges. It turns out that the first bonds were invented six centuries ago. One of the first issuers was the East India Company, which transported spices and even made several major geographical discoveries. It was the largest company of its time, its capitalization in today's money was more than seven trillion dollars. This is more than the capitalization of Apple and Google. It is not surprising that such a huge company actively attracted borrowed funds for its large-scale expeditions. In the image below you can see what this company's bonds from 1622 looked like.
Already in the nineteenth century, bonds were used en masse. For example, bonds were issued by the Russian Empire.
Around the same time, the expression “coupon clipping” came into use. When we say this phrase today, we mean that some person receives a fixed income without putting any effort into it.
The thing is that in the 19th century, bonds were issued on a sheet of paper, which consisted of the security itself and the part on which the coupons were located.
Each coupon indicated the amount of payment for this coupon and the time when you can come and receive the payment.
In order for the coupon to be paid for, it was necessary to cut it out of a sheet of paper and present it. Bondholders clipped coupons and received income from their investments. Who can issue bonds? There are no restrictions, and the issuer of the bond can be anyone. Bonds are issued by states, city municipalities, and commercial companies. Even small companies can issue their bonds. Depending on the issuer, bonds will have different credit quality. We will look at this topic below.
What to do if the bond price changes
So, can the price of a bond fall? Yes, maybe we have seen this with examples. What to do? Let's consider all the options.
Sell . If you invest in VDO, and the company’s business is not going well, then you can sell the bond (and even, probably, need to - more details in my course on investing in corporate bonds).
Buy . If you believe in the reliability of the issuer, then you can (and should) buy a bond that is becoming cheaper. Especially if it concerns OFZ.
Nothing to do . If you hold a bond to maturity, you shouldn't care about current prices. In any case, you will earn exactly as much as your yield to maturity.
How much does a coupon bond cost?
A coupon is an interest rate on a debt security, the amount of which is known in advance, as well as the payment dates. The value of the coupon, which can be seen by a participant in trade and investment transactions, is expressed in rubles.
When purchasing a coupon bond, we pay not the nominal value, but the market value, taking into account interest on the coupon for the entire period of ownership of the debt security (from the moment the last payment was made).
The amount of accumulated coupon income on bonds, of course, can be found out on your exchange terminal, but you can view the same information on the sites we mentioned above (which will be even faster and more convenient).
Calculation formula
Now, having understood all the concepts, let's define the formula for calculating the price of a bond. This is exactly the price that the buyer pays when purchasing paper on the secondary market.
PricePurchase = n * (NomRub * MarketCen%) + n * Tax Code, where
- n is the number of bonds;
- NomRub – denomination of paper in rubles;
- MarketPrice – market price as a percentage;
- ACI – accumulated coupon income.
For a better understanding, let’s look at a real example using one of the OFZs. It has the following parameters: Nominal value = 1000 rubles, market value 103.8%, Taxable income = 32.38 (a large value, but soon the coupon will be paid, which is 40.64 rubles). Let's say we want to buy 200 bonds.
According to our formula, we get:
Purchase price = 200 * (1000 * 103.8%) + 200 * 32.38 = 200 * 1038 + 6476 = 214,076 rubles.
In total, to buy 200 bonds with a par value of 1000 rubles, I had to pay as much as 14 thousand more. Not only is the price higher than the face value, but the NKD is also high. But in fact, this is a good security that gives almost 8% per annum. So, in about a month she will have a coupon payment, for which we will already receive 200 * 40.64 = 8128 rubles back. And we will receive such a coupon for a long time, until the maturity date, which is in 9 years. If we want to sell it earlier, the buyer will also pay us both the market value and the income tax, as we did using this formula.
