fixed income securities- A floating rate note, or a bond that becomes a fixed income investment when the interest rate to which it is linked falls to a certain... ...
FIXED INCOME SECURITIES- shares or securities, the income on which is established in the form of a fixed interest rate ... Large economic dictionary
A hybrid form of bonds and preferred stock that provides monthly or quarterly fixed payments. At the end of the validity period, the securities are redeemed at their value. In English: Fixed Rate Capital Securities... ... Financial Dictionary
Securities that pay a fixed interest rate. Dictionary of business terms. Akademik.ru. 2001 ... Dictionary of business terms
impaired convertible securities- Convertibles, which are sold as fixed income securities because the market price of the common stock into which they are convertible has fallen so low as to render conversion meaningless... Financial and investment explanatory dictionary
fixed income investments- Securities that pay a fixed rate of return. This usually refers to government, corporate or municipal bonds that pay fixed interest rates until maturity. Financial and investment explanatory dictionary
Government securities- (Government securities) Definition of government securities, securities market Information on the definition of government securities, securities market Contents Contents Theoretical foundations of functioning. Market: structure, ... ... Investor Encyclopedia
INVESTMENT- INVESTINGI. refers to the investment of capital with the aim of making a profit. The expected return may be in the form of dividends, interest or an increase in real capital. Trying to benefit from short-term changes in the value of an asset is called... ... Encyclopedia of Banking and Finance
spread, difference- Commodity transactions: in trading operations with futures, this is the difference in the time of delivery of products to the same market or to different markets. See also mob spread; nobspread; ted spread. Fixed income securities: 1) Difference... ... Financial and investment explanatory dictionary
Exchange market- (Stock market) The stock market is a market for certain financial instruments that has regulated rules for carrying out exchange transactions Stock market, types of stock markets description and general concepts Contents >>>>>>>>>> ... Investor Encyclopedia
Books
- Bond Market Analysis and Strategies, Fabozzi F. Frank Fabozzi is a world-class bond expert. His books are the primary source of information for financial professionals who study bonds. They are taught in leading...
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Fixed income securities usually include bonds and preferred shares. The definition, classification, economic content and legal nature of these instruments are the subject of other courses; here we will consider only their assessment with a known alternative return r.
Valuation of zero-coupon (discount) bonds
By definition, zero-coupon (discount) bonds, or, as they are also called, zero-coupon bonds, are sold at a discount (discount) from their par value (face or face value) and are redeemed at par. These bonds do not provide for any interim payments.
If we denote by PV– current value of the bond; F– its nominal value; A n– number of years until maturity, then the assessment will be made using the formula:
In formula (2.14), the number of years until maturity can be either an integer or a fraction.
Example.
It is necessary to value a six-month government bond with a par value of RUB 1,000 if the alternative annual yield is 16%.
Solution. Applying formula (2.14) taking into account the time to maturity equal to half a year, we obtain
PV = 1000/(1 + 0.16) 1/2 = 928.50 rub .
Valuation of coupon bonds6
Unlike zero-coupon bonds, coupon bonds require regular payment of interest income, usually at a fixed rate as a percentage of the face value, and at the end of the circulation period, along with the last interest payment, the face value of the bond is repaid. The coupon rate is usually denoted r c, its value is equal to the total annual interest income divided by the face value of the bond. If the frequency of coupon payments on a bond is higher than once a year, then coupon payments With are calculated as the annual interest income on the bond divided by the number of payments in the year.
Example .
The bond has a par value of $1,000 and a coupon rate of 12%. If interest is compounded once a year, payments will be $120 at the end of each year until maturity. If payments are provided twice a year, then they will pay $60 at the end of each half-year. If interest is paid quarterly, the lender's income will be $30 at the end of each quarter.
If through m denote the number of periods remaining until the bond matures, then in the above notation formula (2.13) for a coupon bond will take the form
Relationship (2.15) is quite easy to simplify using formula (2.7) for the discounted value of a fixed-term annuity with constant payments:
From the above formula it follows that the current value of a bond largely depends on the rate of return that the market requires from securities of a given risk level. If this market rate of return (required level of income) exceeds the established coupon rate, the bond is sold at a discount (discount) from par. Otherwise, the bond is sold at a premium. If the required income level and coupon rate coincide, the bond is sold at par. It can also be shown that for a given change in the required level of yield, the price of the bond will change the more, the longer the period of time until its maturity.
Example.
Calculate the market value of a bond with a par value of 1000 rubles. with quarterly payment of coupon income. There are two years left until the bond matures. Coupon rate - 10%; As the rate of return on alternative investments, take 8% per annum.
Solution. Since the bond income is paid four times a year, the coupon payment will be
c = 0.1 1000/4 = 25 rub.
The quarterly rate r sq can be found from the relation
(1+ r kv) 4 = 1+ 0.08, from where r kv = 0.0194 or 1.94%
(this assumes that the alternative rate is calculated once a year). Then, in accordance with formula (2.16):
PV = 25/0.0194 + 1000/(1+0.0194) 8 . = 1041 rub. 13 kopecks
It should be noted that the bond's estimated value is higher than par: this is because the coupon rate exceeds the alternative yield.
Valuation of perpetual bonds and preferred shares
Although the legal nature of shares and bonds is fundamentally different, from a financial point of view the procedure for valuing them can be similar if both instruments involve fixed regular payments of income to holders.
To evaluate a perpetual financial instrument, you should use the formula for the present value of a perpetual annuity (2.11):
Where With– income for the corresponding period, r– periodic rate of expected return.
Solution. Since the share dividend is paid twice a year, its value will be 0.15 * 10/2 = 0.75 rubles, or 75 kopecks. The dividend is paid at the end of each half-year, therefore it is necessary to determine the semi-annual discount rate r pg based on the given market capitalization rate: (1+ r pg) 2 = 1+ 0.20, from which r pg = 0.0954. From formula (2.11)
PV = 0.75/0.0954 = 7 rub. 86 kopecks
Valuation of common shares
Estimating the market value of ordinary shares within the framework of the basic model used (in relation to shares, it is called the dividend discount model) is significantly complicated by the fact that dividends on these instruments are paid based on the results of the enterprise’s economic activities. As a result, it is necessary to have a fairly reliable forecast of expected dividend payments. However, forecasting dividends, even if the company adheres to a stable dividend policy, is a rather difficult task due to the presence of economic risks. However, there are a number of techniques and models7 that make it possible to approximate future payments with a certain degree of accuracy, which, accordingly, makes it possible to use formula (2.13). Denoting dividends for the corresponding period through Div i, from formula (2.13) we obtain:
Where r– rate of expected return (market capitalization) for the corresponding period.
It should be borne in mind that future payments (dividends) mean not only dividends themselves, but also liquidation payments and redemption payments when repurchasing shares from shareholders. The infinite summation in formula (2.17) may also raise questions about its applicability in the case of a limited share holding period. However, the assumption about the possible sale of a share by its current owner does not limit the applicability of formula (2.17): each of the subsequent buyers of the share will give for it a price equal to the current (at the time of acquisition) value of the cash receipts expected by him. More serious doubts about the applicability of formula (2.17) may be caused by the fact that most firms consistently reinvest a significant part of their profits, and some have not paid any dividends in their entire history, reinvesting all generated profit in its financial and economic activities. A detailed rationale for the applicability of the discounted cash flow model to the valuation of stocks that pay restricted dividends is usually provided in corporate finance courses. In this course it will be sufficient to note that the value of a share can be presented not only as the sum of discounted future dividends, but also as the sum of discounted free cash flows of the company8 or as the sum of discounted average the company's future earnings plus discounted growth opportunities (the latter option if the company chooses a growth strategy). Dividends in the latter case may be little or nothing for many years, but sooner or later growth must slow down before the firm has the cash to pay dividends. Some calculations justifying the application of formula (2.17) to the valuation of ordinary shares can be found in Appendix 1 to this chapter.
The most commonly used model is the Gordon model, which uses the assumption of a constant rate of dividend growth. If we denote by g dividend growth rate, then the dividends of subsequent years will be expressed through the dividend at the end of the first year Div 1 formulas:
Then relation (2.17) will take the form
(2.18)
which can be collapsed based on the marginal transition in the formula for the discounted value of a perpetual annuity at i→∞(formula (2.12)) . As a result we get:
(2.19)
Formula (2.19) is the Gordon model. Obviously, in reality it is difficult to expect stocks to strictly follow this model, even for companies with an established dividend policy. The rate of growth of dividends may change over time; there may be periods of constant dividends, followed by periods of growth or reduction, etc. From a purely mathematical point of view, taking into account the more complex nature of changes in dividends is not a problem and the corresponding material can be found in courses on financial calculations. However, it should be borne in mind that the error in predicting dividend payments is quite large and can negate the most sophisticated mathematical models. That is why in practice, for assessment purposes, fairly simple models are used that combine periods of zero and uniform growth.
The Gordon model, unlike other formulas given, has limited applicability: the rate of dividend growth must be strictly less than the discount rate (this follows directly from formula (2.19)).
Example.
Estimate the market value of an ordinary share if, over the next five years, the dividend on it is expected to be constant and equal to 80 kopecks, after which the beginning of unlimited growth of 5% annually is predicted. Payment of dividends is once a year. The market capitalization rate is 15% per annum.
Solution. Since dividends are projected to be constant over the first five years, the formula for the discounted value of a term annuity with a constant payment (2.8) should be used to calculate its contribution to the estimated value of the stock. A further annual increase in dividends by 5% is taken into account in accordance with formula (2.19). In this case, the result of applying the Gordon model should be discounted five years ago to obtain an estimate of “today”. The estimated cost will be:
PV = 0.8/0.15 + 0.8(1+0.05)/[(0.15-0.05)(1+0.15) 5 ] =
= 2.68+4.18 = 6.86.
The estimated value of the share will therefore be 6 rubles. 86 kopecks
The above approach to the valuation of financial assets based on discounted cash flows is based on a number of obvious provisions: it is the future, expected cash flows that are discounted; past receipts are not important for the assessment; Discount rates should reflect the level of risk inherent in the financial asset being valued.
It is obvious that the use of the described stock valuation model, based on discounting future dividends, requires not only the presence of a fairly efficient financial market, but also very high professional qualifications of analysts. World practice has developed a number of alternative methods for valuing ordinary shares. Some of them, in particular the net asset value model and the approach based on P/E-multiplier will be discussed below, in relation to low-liquidity financial markets characteristic of transformational economies.
What kind of income do securities bring?
Different securities make money in different ways. Before investing, study what determines the income of a particular security.
What is income? Types of income from securities
Revenue is the difference between revenue and costs. It comes in two types: current - for a period and final - for all time. Calculated in monetary units.
The following types of income from securities are known:
- dividends;
- change in exchange rate;
- interest;
- discount;
- premium and margin.
They depend on the type of paper.
Income from shares
A share is a security that allows you to receive part of the company’s profits, since its buyer automatically becomes a co-owner of the company.
There are two ways to make money on shares: dividends and resale of securities at an increased market price.
Dividends
Dividends are part of the profit that the company pays to shareholders based on the results of the reporting period.
According to the type of shares, dividends are:
- ordinary;
- privileged.
The amount of dividends is set by the board of directors at the general meeting of shareholders. Preferred dividends can be fixed and do not depend on the profit of the enterprise. They are paid first.
Based on the frequency of payments, dividends are divided into:
- annual;
- semi-annual;
- quarterly.
More often than not, dividends are paid annually.
According to the method of payment, dividends are:
- monetary - paid in cash;
- property - paid in shares, goods or property rights.
By size, dividends are divided into:
- full - paid in full;
- partial - paid in parts.
The terms and procedure for payments are determined by the company's charter or meeting of shareholders. The dividend policy of each company is individual.
If an organization has no profit for the last period, it can pay dividends from retained earnings from previous years or from special funds. On the contrary, a company can save profits if it needs money for development.
You will receive dividends even if you have held the shares for only a few days. The main thing is to have time to get into the register of shareholders.
Change in market price
If a company does not make a profit, it cannot pay dividends. Then the only way to make money on its shares is to resell them for more than the price at which they were purchased.
The market price is formed as a result of trading and depends on supply and demand in the market. The better a company performs, the higher the demand for its shares and the more they will be worth. If things go wrong for a company and the stock price begins to fall, it is better to sell them immediately. And if the price rises, buy again and resell at a higher price.
You can earn money both ways. Let's say you bought a share for 1000 rubles. A year later, you received a dividend of 100 rubles and resold the share for 1,200 rubles. In total, your income was 300 rubles.
Bond income
Unlike a shareholder, a bondholder is not a co-owner of the company, but rather a creditor. There are two ways to earn income from bonds:
- a fixed interest rate that the company undertakes to pay throughout the life of the bond;
- the difference between the market and par prices of a bond, or the purchase and sale prices.
Coupon payments
Dividends are paid on stocks, and coupons are paid on bonds. Only, unlike dividends, coupons are mandatory payments.
They are:
- fixed - the same amount is paid regularly, which is set in advance;
- variable - the payment amount may change.
Coupons, like dividends, are paid quarterly, half-yearly or annually. The coupon income is accrued every day, but is paid on a certain date.
The coupon amount depends on the size of the company. The larger the enterprise, the lower the coupon payments on its bonds.
Price difference
As with stocks, bonds make money through price changes. On a specific day, the company buys the bond from you at a set par price, or pays the amount in installments if the bond is amortizing. The main thing is to purchase a bond at a price below par. Then the difference between the purchase price and the face value paid - the discount - will be your income.
If a bond has zero coupon, it usually sells for significantly less than face value. And the earnings from price changes are impressive. But most often such bonds are issued by companies close to bankruptcy.
It is not necessary to hold the bond until the end of the term; you can sell it at any time and make money on the difference between the purchase and sale prices. But if the bond is coupon, you will lose further interest payments and you will have to transfer the accumulated coupon income to the new owner.
Income from mutual funds
For mutual funds, income is generated through the activities of management companies. They consider all types of securities income to obtain the best returns for clients. Each management company has its own methodology.
Shareholders earn from the increase in the value of the share. If the prices of securities in the assets of a mutual fund rise, the value of its shares increases. The investor's income consists of the difference between the purchase price and the price at which he sells the increased share back to the management company. But the value of the share may fall, and then the investor will be at a loss.
Shareholders do not receive dividends or interest.
Income from other securities
Securities reflecting loan relationships
Interest and discount are the main types of income from securities that establish a loan relationship between the seller and the buyer. In addition to bonds, these include bills of exchange, certificates of deposit, and savings certificates. Anyone can buy bills of exchange, savings certificates are purchased by individuals, and deposit certificates are purchased by legal entities. Unlike a certificate, the holder of a note cannot pay it off at any time without cost.
Interest rates on these securities are determined by the Central Bank. You can receive income in the form of a discount if you buy securities at a price below par.
Securities giving the right of ownership
Securities representing ownership rights include options, futures and warrants. The owners of these securities are either obligated, in the case of futures, or have the right, in the case of options and warrants, to purchase the assets within a specified period of time at an agreed price. Warrants are used to purchase securities; options and futures are used to purchase any assets.
As income, the seller receives a premium - a commission from the buyer, and the buyer makes money on the difference in value: he sells the asset at a more expensive price if it has fallen, or buys it at a lower price if it has risen. Option sellers or both parties to futures transactions may post margin, a guarantee that can be used to pay off a position if the other party defaults.
Where is it more profitable to invest?
Securities are more profitable than bank deposits because their income is higher. But it depends on the risk. The riskier the security, the more income it can bring.
There is virtually no risk on government bills. Low-risk include other government securities, medium-risk include corporate bonds. They are suitable for lovers of conservative strategies.
The highest risk is in stocks, options and futures, but these securities bring the greatest income.
The Right service helps you select stocks and bonds taking into account your desired risk-return ratio. Using simple questions, he determines the strategy that suits you, assembles and manages your portfolio.
Classification of securities according to their investment opportunities
Essence and classification of securities
Investment activities using securities
Due to their specific features, securities allow the implementation of various investment strategies.
The main difference between securities and other objects of civil law transactions is that securities provide 2 types of rights.
Firstly, real rights arise on securities, especially property rights. This allows you to carry out any legal transactions with securities, including purchase and sale transactions. Property rights to a security provide such properties of securities as negotiability (the ability to be bought and sold on the market, as well as act as an independent payment document), accessibility for civil circulation (securities can be the subject of any legal transactions - pledge, donation, inheritance, encumbrance, etc.).
Secondly, there are rights arising from possession of a security - the right to a portion of the profit, to the unconditional return of the borrowed amount, to manage the issuing company, etc. It is this set of rights secured by a particular security that determines its value and market value. The reliable exercise of rights under a security is facilitated by such properties as standardness (the law establishes standards for the issuance and circulation of securities, rules for accounting and fulfillment of obligations, types, types and forms of securities, etc. seriality (issuing securities in series simplifies the procedure for confirming and exercising rights), regulation and recognition by the state (a security is considered only such a financial document that is registered as a security in the manner prescribed by law and/or is recognized as such by law), mandatory performance(refusal to fulfill obligations secured by a security is prohibited, except in cases provided for by law).
General classification of securities
Securities can be classified according to many criteria. First of all, securities must be divided into 2 type- emission and non-emission.
Issue-grade security characterized by the following features:
Secures a set of property and non-property rights that are subject to certification, assignment and unconditional implementation in compliance with the form and procedure established by law;
Posted in editions;
Has equal volume and terms of exercise of rights within one issue, regardless of the time of acquisition of the security.
Typical representatives of equity securities are stocks and bonds.
Non-issue securities do not possess the combination of these three characteristics. Non-equity securities include certificates of deposit and savings, bills of exchange, and checks.
In the legal aspect, the most important is the fact that the Federal Law of April 22, 1996 No. 39-F3 “On the Securities Market” regulates relations arising from the issue and circulation of only issue-grade securities, regardless of the type of issuer (the circulation of other securities is regulated by this By law only in cases provided for by federal laws). This means that the norms specified in this Law (for example, on licensing the activities of professional participants in the securities market) are applicable primarily to transactions with bonds and shares.
Another method of classification is to divide securities into classes depending on the subjects of the rights certified by the security. Based on this feature, the following are distinguished:
registered valuables paper- the rights certified by the security belong to the person named in the security. Information about the owners of registered securities must be available to the issuer in the form of a register of owners of securities, the transfer of rights to which and the exercise of the rights assigned to them require mandatory identification of the owner. According to the Law, in Russia all shares of joint stock companies must be registered;
securities for bearer- rights belong to the bearer of the security; the transfer of rights to such securities and the exercise of the rights secured by them do not require identification of the owner. An example of such paper in Russia was government savings loan bonds (OGSZ);
order securities - the rights belong to the person named in the security, who can exercise these rights himself or appoint another authorized person by his order (order). A classic example of an order security is a bill of exchange.
The investment opportunities of a security are a complex characteristic that reflects a set of certain qualities of a security that makes it attractive to a particular investor. The most significant qualities that determine the investment attractiveness of securities include their profitability, liquidity, risk, method of providing income and the validity period of the security.
The combination of these qualities of securities allows us to conditionally divide all securities into three type:
1. Fixed income securities.
3. Derivative securities.
Let us dwell separately on these types of securities and identify those investment qualities that distinguish them from each other.
These securities collectively have a number of specific properties:
1. As a rule, these are debt securities that establish a loan relationship between the borrower (issuer of the security) and the lender (investor, owner of the security). Such securities include bonds, certificates, bills, checks, etc. By law, all payments on securities of this type are the obligations of the issuer and do not depend on its financial and economic condition. The issuer's evasion from making declared payments on fixed income securities is sufficient grounds for the holder of such a security to initiate a procedure for the forced fulfillment of obligations.
2. For them, the issuer introduces a certain maturity date. This date refers to the day on which the borrower (issuer) must first pay the investor the borrowed amount, which is face value (face value) security, and, secondly, interest (if it is provided for by the terms of issue of the security).
3. They have a fixed or predetermined scheme for paying par and interest (coupon) amounts. There are various payment methods for fixed income securities, but the three most commonly known are:
a) individual securities are placed by the issuer on the primary market at a price below par, the so-called discount price. Payments on such financial instruments are made once on the maturity date, when the issuer pays the investor the face value of the security. Such securities are usually called discount, zero coupon. An example of a discount security is domestic short-term government bonds (GKOs). Such bonds are placed by the Central Bank of the Russian Federation during auctions at a discount price (let's say 970 rubles), and after a set period (3, 6 or 12 months) they are redeemed and the nominal value of 1000 rubles is paid.
One property of discount securities should be noted: until the moment of maturity, their market price is always below par (the opposite would imply the existence of negative nominal interest rates, which cannot theoretically be the case);
b) other fixed income securities can guarantee the receipt of fixed interest (coupon) amounts and par at strictly defined intervals. Russian practice knows two schemes for paying fixed coupon amounts:
- constant coupon income - in this case, the amount of interest payment is fixed once and does not change until maturity. For example, the issuer of the corporate bond Alrosa 19 guaranteed a constant coupon payment of 16% of the face value until maturity. A similar scheme is laid down in foreign currency bonds of the state internal currency loan (OVVZ), for which coupon payments amount to a constant 3% of the face value;
- fixed coupon income- in these cases, the issuer fixes the amount of the coupon payment, which remains unchanged over several coupon periods. Then the coupon rate changes and is fixed again over several coupon periods, etc. For example, on March 20, 2002, the Ministry of Finance of the Russian Federation placed federal loan bonds with a fixed coupon yield (OFZ - PC) with a maturity date of September 14, 2005. According these bonds had the following scheme for paying coupon amounts: for the first and second coupons - in the amount of 15% per annum, for the third - sixth coupons - 14% per annum each, for the seventh - fourteenth coupons - 12% per annum each (coupon payments for these bonds are 4 once a year);
c) in recent years, securities for which the interest (coupon) amounts paid are not fixed, but dependent, associated with other economic indicators - the profitability of other financial assets, the inflation rate, the state of the stock market, etc., have become widespread in the world. An example is government savings bonds issued in Russia. According to the Terms of Issue of these bonds, the coupon income on them is determined as the sum of two components: firstly, the product of monthly consumer price indices (CPI) expressed in fractions of a unit for the 6 months preceding the month during which the coupon income is announced, and, secondly, secondly, a fixed rate determined by the issuer in the decision on the issue (no more than 0.35% for the coupon period).
4. As a rule, fixed income securities are quoted not in monetary units (as is the case when shares are quoted), but as a percentage of the nominal value. For example, on February 22, 2005, at the close of trading on the MICEX for Alrosa 19 bonds, the bid price (bid) was 106.7% of the face value, and the offer price (asked) was 106.95% of the face value of the bond.
Classification of fixed income securities. There are different ways to classify fixed income securities, but they generally fall into three categories:
Permanent (demand) deposits and time deposits;
Money market securities;
Bonds.
Perpetual and time deposits. Currently, in Russia, the securities of this category are mainly deposit and savings certificates. Certificate of Deposit And savings certificate - this is a written certificate of the credit institution - issuer about the deposit of funds, certifying the right of the depositor (“beneficiary”) or his successor to receive, upon expiration of the established period, the amount of the deposit (deposit) and interest on it. Certificates of deposit can be issued by both banking and non-banking credit organizations, while savings deposits can be issued only by banks. Deposits can be issued either one-time or in series, and can be registered or bearer. Both deposits are term deposits. Settlements for a certificate of deposit are carried out only by non-cash method; for savings certificates, payments in cash are possible.
An example of a demand deposit would be checking accounts. In the West, they are offered to clients by many financial institutions - commercial banks, savings, loan and credit institutions. The owner of a checking account is paid an annual interest of 3 to 5% of the account balance; As a rule, interest payments are made if the balance amount for the year does not fall below the established level (usually in the range of $500-2500). Since the owner of a checking account is given the right to withdraw money at his request, checking accounts are called demand deposits.
Let us give examples of other securities of this type found in financial markets, for example, the USA. Money market investment deposits (MMI deposits) They are a type of certificate of deposit. Main distinguishing feature MMI deposits is that the annual interest amount paid on them is not strictly fixed, but is set at least 0.25% higher than the yield on treasury bills ( Treasure bills) with the same maturity. Minimum deposit amount for MMI the deposit is 10 thousand dollars, and the repayment period is set above six months. Thus, an investor can purchase MMI deposit for 10 thousand dollars with a repayment period of 6 months. If treasury bills with a maturity of 6 months provided a yield of 4.2% at this moment, then MMI the interest on the deposit will be no less than 4.45%; in the event of an increase in the yield of treasury bills to 4.34% interest on MMI deposit increases to 4.59%.
Indexed CDs appeared in the USA in 1987. The main difference between these securities is that the interest paid on them is “tied” to stock market performance, i.e. is indexed. Typically, when purchasing such a certificate, an investor can choose the minimum interest rate, let’s say 4.5%. If during the validity of the deposit the stock market indicators went up, the owner of the deposit will receive an increase in the interest amount paid. Thus, these deposits guarantee their owner a certain minimum income and provide the possibility of additional benefits in the event of an increase in share prices on the stock market.
Eurodollar deposits- These are international time deposits. They are denominated in dollars and issued by commercial banks located outside the United States. Eurodollar deposit accounts typically have higher interest rates than similar time deposits offered by banks in America. This is explained by a higher level of risk for Eurodollar deposits due to other deposit insurance conditions, floating exchange rates, and political instability.
Deposits have an important positive quality - high reliability. This is explained by the fact that in many countries (currently in Russia) deposits of individuals in banks for time and non-term deposits are provided with state insurance (in the USA deposits up to 100 thousand dollars inclusive are insured; in Russia deposits up to 125 thousand rubles). In this regard, the risk associated with investing in deposits is small. However, deposits also have a number of disadvantages: due to the low level of risk, the return on deposits is the lowest of all fixed income securities. In addition, deposits do not provide an adequate degree of liquidity, since there is practically no secondary market for these securities. Therefore, many investors choose to invest in money market securities.
Money market securities have distinctive features:
Typically their repayment period does not exceed 12 months;
They have fairly high liquidity, since they can be freely sold and bought by investors on the secondary securities market;
As a rule, they are placed by the issuer at a discount price. Money market securities allow borrowers (the government, and
In the West - and large corporations) to obtain borrowed funds from individual and institutional investors by selling the latter short-term securities, which are, in fact, unsecured bills. The most common type of money market security in Russia is short-term government bonds (GKOs).
Bonds are called fixed income securities that secure the right of its owner to receive from the issuer of a bond within the period specified in it its par value or other property equivalent. A bond may also provide for the right of its owner to receive a fixed percentage of the nominal value of the bond or other property rights. The yield on a bond is interest, or discount. There are 2 main differences between bonds and money market securities. First, a significant number of bonds are sold at par with subsequent interest payments. Secondly, the maturity of bonds exceeds a year and can span several decades. Bonds can be classified according to various criteria. In particular, the division of bonds depending on the type of their issuer is important. On this basis, bonds are divided into the following types:
State - the issuer is the state (in Russia - represented by the Ministry of Finance).
Bonds government agencies(represented by ministries and departments). As a rule, these institutions issue bonds and use the funds received to lend to small businesses, the education system, housing construction, and support for farms. In the Russian securities market, an example of a government bond is the Bank of Russia bond.
Municipal - the issuer is regional and local authorities. Investing in municipal bonds generally involves greater risk than purchasing government bonds or government securities. This is due to a number of circumstances: firstly, practice shows that the issuer (local government) sometimes fails to fulfill its bond promises, i.e. investing in local government bonds is associated with credit risk (risk of bankruptcy, default) ; secondly, despite the fact that many bonds are insured by private insurance companies, there have been cases where, when the issuer (local government) goes bankrupt, the policyholder is unable to cover its debts; thirdly, due to the fact that a significant number of bonds of this type are traded on the financial market, investors often have difficulty selling them, i.e. investing in municipal bonds is associated with the risk of illiquidity.
Corporate - the issuer is legal entities (usually open joint-stock companies). The rules and features of the issue of bonds by joint-stock companies are given in the Federal Law of December 25, 1995 No. 208-FZ “On Joint-Stock Companies”. Corporate bonds are usually classified according to the degree of risk associated with their purchase. Considered the most reliable bonds secured by collateral. If bonds are secured by the company's real estate, then they are classified as mortgage bonds. The company's financial assets can also be used as collateral.
Another category is represented by unsecured bonds. In recent years, bonds of companies borrowing money for very risky projects have become widespread in the West - if successful, they provide higher interest rates than other bonds. Such bonds are classified as “second-rate, junk” (junk bonds).
In order to attract investors, companies introduce additional benefits for bond buyers. For example, many Russian issuers of corporate bonds stipulate in their decision to issue offer- the ability of the bond owner to return the bond to the issuer within a specified period at the redemption price (offer price). This can be advantageous to potential bond buyers if interest rates rise and the bond's market price declines. The offer increases the liquidity of the bonds.
Russian legislation allows corporations to issue convertible bonds, which can be converted either into shares or other bonds of the same company. The ability to convert a bond allows firms to include a provision in the terms of the issue early call of bonds, under which the firm has the right (but not the obligation) to call (redeem) its bonds before the stated maturity date. This right allows issuing firms to respond more flexibly to financial market fluctuations in the event of a decrease in interest rates. Indeed, if the coupon payments on the Alrosa 19 bond are 16% per annum, then the owner of the bond receives 80 rubles in interest payments. every six months (coupon payments on this bond are made 2 times a year). Let's imagine that the inflation rate decreases and market interest rates fall to 8% per annum. In this case, it is not profitable for the issuing company to pay an annual interest rate on the bond that is 2 times higher than that established on the market. Therefore, she will redeem the bonds ahead of schedule and issue a new loan at 8% per annum, thus saving millions of rubles. on interest payments.
Foreign - the issuer is government agencies and corporations of other countries. These bonds are widely used in the West because they allow you to get higher returns. Investing in bonds of other countries has another attractive feature - changes in their prices are not associated with fluctuations in the prices of domestic financial assets, which allows for greater diversification of the investment portfolio.
So, the investment opportunities of fixed income securities are determined by a combination of the following qualities:
a) they are debt securities and any payments on them represent obligations of the issuer;
b) the owner of such securities knows in advance the dates and amounts of upcoming coupon payments on them;
c) the securities are redeemed within the established period, when the issuer pays the owner of the security its face value;
d) after redemption and full settlements with their owners, fixed income securities cease to exist and cease to generate income for investors.
Fixed income securities are debt obligations in which the issuer agrees to perform certain actions. As a rule, this is a negotiable payment of a sum of money and interest.
There are the following types of fixed income securities: government loan (government loan to create special funds); utility loan (to balance the public finances of local governments); utility bonds and letters of pledge (mortgage banks provide long-term loans secured by land plots or debt obligations of partnerships); industrial bond (fixed income debt of an industrial company).
Somewhat similar to industrial bonds are debentures and option loans. These are transitional forms of fixed income securities to shares (their purchase is associated with the opportunity to purchase shares in the future).
Option loans and conversion obligations, like industrial bonds, are listed on the stock exchange, their rates are published daily.
A bill of exchange is a security that attests to the unconditional obligation of the drawer. There are promissory notes and bills of exchange. Each of them has corresponding details. The procedure for the purchase and sale of bills of exchange is determined by the Cabinet of Ministers.
Shares are numbered securities, documents that confirm membership in a joint stock company and give the right to receive dividends. The issue of bearer shares is limited in all countries. As a rule, shares are stored with brokers or other specialized offices. The owner only has a certificate of the number of shares. A distinction is made between ordinary and preferred shares. Common shares give their owner the right to one vote at shareholder meetings. In addition, the owner of an ordinary share has the right to receive part of the net profit, which is distributed in the form of dividends.
When a joint stock company is liquidated, its claim to property is the last. He receives what remains after paying debts and settlements with preferred shareholders. Preferred shares give the owner the right of preferential ownership of the profits and property of the joint-stock partnership, sometimes guarantee a fixed income (if the partnership has received net profit) as well as special voting rights (several votes, the right to participate in making relevant decisions at shareholder meetings) .
The most common preferred stock is a fixed income stock with no voting rights. Payment of dividends on these shares is not obligatory for a joint stock company. Their delay or non-payment does not lead to bankruptcy. The issue of preferred shares is limited by law.
An investment certificate is a portion of a special securities fund (investment fund) managed by an investment company. An investment fund can be composed according to different principles: it can include only shares of large companies or only bonds. The main purpose of forming such a fund is to minimize exchange rate dividends and, accordingly, interest rate risks based on a wide differentiation of deposits and payments to owners of investment certificates of maximum income.
In the area of activity of modern stock exchanges, a number of securities with new characteristics appear. The reason for this is mainly the need to improve the organizational structure of stock markets. These new securities include convertible stocks and bonds, futures, and options.
Futures are standard time-based contracts concluded between the seller (issuer) and the buyer to purchase and sell the relevant security at a pre-fixed price. Options differ from futures in that they imply the right, rather than the obligation, to carry out a particular transaction, which guides the buyer of the option.
It limits the impact on its assets and liabilities of negative market movements to the amount paid for the contract. One of the types of options are options that give their owner the right to purchase the corresponding stock values. They are distinguished from options by their longer term and by the fact that the option is naturally issued on an existing asset.
In recent years, warrants have increasingly been issued with bonds, making the latter more attractive to investors. By purchasing a bond, the owner is, in fact, issuing a loan, which should bring in a profit sufficient to pay interest and dividends.
Convertible bonds differ from option bonds in that the owner cannot sell the right to receive shares at a fixed price in a market separate from the bond.
investment stock bond income