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How to choose the right bonds to invest in? A short guide

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A lot of people wonder how to choose the right asset to invest in. One of the options is bonds. In the article we are going to pay attention to this theme.

  1. What are bonds?
  1. What else to study before buying a bond
  1. What should I remember?
  1. What are bonds?
Central-bank easing triggers record corporate bond issuance | Financial  Times

When companies or governments need money to borrow, they issue bonds. When issuing bonds, the initial value of the paper is determined – the nominal value. By purchasing such a security, you become the Issuer’s lender. The Issuer undertakes to pay you interest coupons for the use of your money during the specified period of the bond’s circulation. It turns out that the principle of operation of bonds is similar to the principle of lending in a Bank. Only in the case of bonds, you are the lender. You probably know that before issuing a loan, banks carefully study the borrower’s credit history, marital status, and many other factors that may affect the Bank’s final decision. Before buying a bond, it is just as important for you to study the Issuer to whom you are going to lend money.

What parameters does the bond have?

Each bond has a number of important parameters that you should pay attention to before buying:

The nominal value Is the amount that the Issuer borrows from you. 

A coupon Is a percentage that will be paid for using your money. Most often, such payments are made 2-4 times a year. Coupons can be floating or fixed. In the case of fixed coupons, you always know in advance how much you will be paid. If the coupon is floating, then you only know the amount of the next payment, and it is not easy to predict the total yield of the paper.

Maturity date.This is the date when the Issuer returns the face value of the bond to the investor. If you are a beginner, it is best to choose bonds with a maturity date by the time you need cash. In this case, you will always know in advance how much money you will receive and when. However, it is not necessary to hold the bond until maturity; it can be sold on the exchange to other market participants.

  1. What else to study before buying a bond
Bond deal/Issuing Bonds: How does it go down?

The Issuer Is the one who issues the bond. The most reliable securities are those issued by the state-OFZ (Federal loan bonds). It may seem that buying OFZ is not very profitable because of the low yield. However, such bonds can be purchased on an IPO and receive a tax deduction of 13% of the invested funds. In addition to the state, bonds are issued by the authorities of regions, districts, cities, and some companies.

Rate of return – the rate of return should be commensurate with the current key rate of the Central Bank and the average Deposit rate. Too high bids can lead to risks. For example, if the coupon rate is five percentage points higher than the Central Bank’s key rate, then you will have to pay 35% of personal income tax if you exceed it.

Availability of the offer- this obligation under which the Issuer undertakes to redeem the bond ahead of time. For example, if the bond’s maturity date is April 10, 2027, then the Issuer can buy such a paper from the investor earlier under the offer. Terms are agreed in advance. The bond is repaid at the value set at the time of issue, usually at the nominal value.

Date of issue of the paper. Please note that bonds issued after January 1, 2017 are not subject to personal income tax. But this principle is only valid until the end of 2020. Keep this point in mind when calculating the final return.

  1. What should I remember?
How Does A Bond Work? A Simple (And Informative) Guide - Money Under 30

Bonds are a reliable investment tool that is closest to Bank deposits. For using your money, the Issuer pays coupons, and on the maturity date of the paper pays the face value of the bond. Before buying a bond, first of all, you need to choose a reliable Issuer and decide on the terms of investment. If you have any questions, you can always consult a financial adviser.

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