Bonds: What Are They?

Bonds are financial instruments representing a credit: the holder of a bond acquires the right to receive from the issuer one, or a series, of cash flows distributed over time.

In this sense, the difference between shares and bonds is clear: a share represents a right to participate in the life of a company, both by voting and by sharing in profits, while a bond is an instrument that day one defines, in terms of cash flows, what the holder is entitled to and what the debtor is obliged to, but does not give the holder any other rights.

Among the Bodies, the Treasury and the other State agencies stand out, in addition to the supranational bodies while among the private ones the commercial companies stand out. Bonds can be listed on the stock exchange, but most of the trading is concentrated with wholesalers, or market makers, or even primary dealers: their business is to guarantee the liquidity of the bonds, providing investors with continuity a price and a minimum negotiable quantity.

We can characterize bonds in various ways: Based on the type of issuer: public or private Based on the type of remuneration offered to the subscriber: which can be determined based on a fixed percentage of the nominal value (fixed coupon bonds), or it can be variable and therefore indexed to an external parameter (variable coupon bonds) ;

or it can be implicit in the discounted price that is applied at the time of issue (zero-coupon bonds) Based on the issuing currency based on any ancillary guarantees offered to the subscriber (bonds guaranteed for example by mortgages) Based on the options guaranteed to the subscriber or issuer (convertible bonds and callable bonds).

Investing in bonds requires an evaluation of the yield offered in issue (evaluation which will differ according to the characteristics of the bond itself that we have listed above), of the current price of the bond (which is not always identical to the issue price, and to which the coupon and all other forms of remuneration must then be related) and also the risks associated with the obligation.

These risks can be divided into three major categories, which are The issuer’s solvency risk, also called default risk The risk that arises from fluctuations in market yields The risk of the currency of denomination We will return to these three risks, and the other characteristics of bonds, in the next guides.

Also on the fact that the bond market is a loan market, and in this sense, it is closely linked to the interbank liquidity market and more generally to the money market.