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Bonds

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The bond is a mobile value issued with interest (or with discount, in the case of zero - coupon bonds) by which the issuer undertakes to pay the holder, at certain time intervals, a certain amount of money, called a coupon, as well as to return the principal on maturity.

Bonds can be issued by the state (government bonds), municipalities (municipal bonds or "munies"), trade companies (corporate bonds or "corporates"), etc.

 

Characteristic elements of a bond


The maturity of a bond represents the settling day, the date when the bond will be redeemed, and "term" and "term-to-maturity" represents the number of years until the due date.

The bonds are classified in 3 categories, according to their maturity, as follows:

  • short-term => 1 - 5 years
  • intermediate-term - bonds also called "notes" => 5 - 12 years
  • long-term => over 12 years

From the point of view of the maturity and the clauses specified in the formal contract between the issuer and the bond holder (indenture or issue prospect), one distinguishes the following types of bonds:

  • bonds which have a single settling day, for instance corporates => term bonds
  • bonds containing clauses which give the issuer the right to fully of partially redeem the bonds prior to the settling day, for instance corporates, munies => these clauses are named call provisions
  • bonds containing clauses which allow the issuer to redeem before the settling day a substantial part of the bonds issued based on a pre- established program, for instance the bonds issued by companies in the industry and utilities sector => these clauses are called sinking-fund provisions
  • issues of bonds containing bond packages with different maturities (serial bonds), for instance munies are generally issued in this way => serial bonds
 

The coupon


The coupon represents the payment of the interest performed by the bond holders during the life of the respective bond.

  • the annual rate of the coupon: the annual interest rate expressed in percentage, which is specified in the issuing prospect;
  • the coupon expressed in absolute value (interest): the amount of money corresponding to the interest owed by the bond holders. It is calculated by applying the rate of the coupon to the nominal value (principal). If the interest is fixed and payable several times a year, one calculates a periodic interest rate of the coupon according to the annual rate of the coupon and the frequency of the payments per year.

The principal (principal or corpus), represents the nominal value of the bond which must be returned to the holder of a bond. The payment of the principal is separated from the one of the coupon. The principal is paid to the investors either on the settling day, or when the issuer resorts to the clauses allowing him to redeem or to withdraw with anticipation the issued bonds. There is also the possibility that the issuing prospect provide the payment of a part of the principle at the same time with the payment of the coupons.

From the principal’s point of view, there are the bonds whose coupon payments also include a part of the principal. The part of the principal which is going to be paid can be expressed as a percentage from the nominal value or as a sum expressed in the currency in which the principal is expressed.

The issue date represents the date when the respective bond was issued. From this date starts the accumulation of the interest corresponding to the first coupon.

The maturity date (the date of the last coupon), represents the date of the last payment of the coupon and the return of the principal.

The yield of a bond is an important element of the investment in a bond. The higher it is, the more profitable the investment in the respective bond is. Often it is compared with the rate of inflation.

The simple yield at maturity takes into account the number of days remaining until maturity and the price of the bond with respect to the redemption value.


Simple yield at maturity = Randament simplu maturitate x 100


Bonds are less risky than shares, the bondholders coming before shareholders at the statement of assets and liabilities. However, bonds are less liquid than the shares.

 

The bond market in Romania


The bond market in Romania is formed at present by the bonds listed at the BVB quota - debt securities sector, respectively 3 issued of corporate bonds (2 at category II and one at category III), 23 issues of municipal bonds and 25 issues of state securities. In the section of international bonds we have at present 2 issues.

State bonds are transacted both on the capital market (beginning with the year 2008) and on the interbanking market. At the same time with transacting the state bonds, one can notice an increase of the number of bond issuers from BVB.

The evolution of the market of the bonds listed at BVB in the period 2001- present is as follows:


Year No. of transacting sessions No. of transactions No. of transacted bonds (volume) Value (RON) No. of issuers No. of newly listed issues
2001 17 5 45 481,42 2 2
2002 247 10 59.050 782.679,31 4 2
2003 241 39 187.870 17.135.351,82 10 8
2004 253 1.116 530.466 289.794.851,55 22 16
2005 247 394 397.101 127.369.058,79 19 6
2006 248 570 3.917.457 985.517.592,79 19 5
2007 250 268 6.652.467 794.335.510,65 22 11
2008 250 552 1.214.353 231.929.950,72 50 33
2009 250 965 2.892.920 1.284.618.844,77 60 16
2010 61 269 198.100 1.385.809.495,06 60 2

For additional details regarding the characteristics of bonds please download the attached document (ap.150Kb).