Bonds, government bonds and other debt securities negotiable on the capital market
Unlike shares, bonds, government bonds and other similar securities represent for companies or entities issuing debt capital, while for subscribers it represents an investment through a very specific financial instrument that guarantees the right to a certain and quantifiable remuneration and the return of the capital itself. In practice, these financial instruments represent a part of the loan or debt taken out by a company, a public body or a supranational body to finance itself.
Bonds and other debt securities are basically issued to private, institutional and simple investors to obtain more advantageous conditions than those offered by the banking system. Those who subscribe for such securities, however, enjoy higher rates of return than investments in liquidity, the security of repayment of the capital invested and also the possibility of disinvesting the investment through the financial market.
The bonds, government bonds and all other types of debt securities have a return and remuneration defined or definable based on certain parameters and conditions, and this remuneration is inversely proportional to the quality of the issuer. For example, the bonds of a very solid company guarantee a lower return than the obligations of a company in economic difficulties. The solvency or quality of the issuer is measured through the rating that estimates the economic-financial situation and the potential of the subject through certain criteria. There are rating institutions that constantly monitor companies, public bodies and sovereign states issuing financial instruments. The most well-known rating companies are Standard & Poor’s, Moody’s and Fitch.
There is an infinite type of debt instruments, each with different peculiarities
For example we can find debt securities:
– At a fixed or variable rate;
– With payment of quarterly, six-monthly, annual interest or with interest paid at maturity (zero coupon bond);
– Structured, where the return is linked to the performance of certain activities;
– Convertibles, where the right to transform debt securities into shares, at a given exchange rate;
– Pre-payable, where the issuer has the right to extinguish the debt before it expires.
All debt securities such as bonds or government bonds are traded on the financial markets and are quoted based on four factors:
– Market interest rate;
– Coupon or the interest paid by the issuing company to the investor;
– Maturity (ie the time left to repay the capital);
– Risk of insolvency (linked to the rating of the issuer).