High yield corporate bonds. Investing for Dummies: How to Buy Bonds
Bonds are the closest alternative to bank deposits on stock market. This securities (debentures companies or the state), which operate on roughly the same principle as Bank deposit. You buy a bond for 100 rubles, and in a year (or any other agreed period) you are promised to return these 100 rubles, plus a fixed percentage of income, which can be paid quarterly, semi-annually or annually. When buying a bond with a face value of 100 rubles. for 100 rub. with an interest rate of 10% per annum for a period of 1 year, you will receive 110 rubles in a year.
Bonds are traded on the stock market. They can be bought either independently by opening, or through management company by purchasing a share in a mutual fund.
Bonds are issued for a fixed period. It can be 1, 2, 3 years or more. If you decide to sell the bonds ahead of schedule, for example, in six months, then in the event of a favorable market situation, you can return their full value and receive interest for six months in full, that is, 100 + 5 rubles.
Bonds are traded on the stock market, their value may decrease. It depends on the international situation, the policy of the Central Bank, the situation in a particular company or industry. Market participants buy and sell securities every day. For this reason, if you decide to sell what you bought for 100 rubles. a bond six months after purchase, against the backdrop of negative news, you can miscalculate. Of course, you will receive all the interest on it for 6 months, that is, 5 rubles, but at the same time the value of the security itself may fall to 95 rubles. That's the amount you can sell it for. In the end, at best, you will remain with your own.
But if the situation changes in your favor and, for example, the United States lifts sanctions on Russia, the cost of the bonds, on the contrary, will increase, and you can sell it, for example, for 105 rubles, and again receive your interest in the amount of 5 rubles. However, we repeat, you can be guaranteed to return your 100 rubles plus 10% per annum only when the previously agreed upon issue period has passed.
Unlike a bank deposit, where the state guarantees the return of 1.4 million rubles. in the event of a bank closure, the return of funds on the bond is guaranteed only by the one who issued this bond - the state in the case of government bonds or the company. For this reason, when choosing a suitable bond, you need to focus not only on its term and yield, but also on the reliability of the company that issued it.
What are bonds?
government bonds
This is one of the safest ways to invest money. This option is of interest, first of all, to those who like to keep funds in Sberbank, where the rate on a deposit for a period of one or three years is 5-6% per annum, and on a deposit with the possibility of replenishment and partial withdrawal without loss of interest is 1.5-2.3%. At the same time, the OFZ yield (federal loan bonds) is about 8%, the interest on 2-year OFZs is about 8.12% per annum. The government acts as a money-back guarantee, so you can safely invest in OFZ more than 1.4 million rubles.
If you want to get a higher yield, then you can buy municipal or regional bonds issued by a large city or region. The coupon income on such bonds is higher than on OFZ, and it is also not subject to income tax. But here the risks are higher, because separate region theoretically can declare himself bankrupt, so it's better to choose largest metropolitan areas and wealthy areas such as Moscow, St. Petersburg, Yekaterinburg, etc. A nice bonus is that income from government bonds is not taxed.
Yield: up to 7.5-8.5% per annum
Entry threshold: 1,000 rubles (that's how much one bond costs).
Corporate bonds
If the OFZ yield seems too modest, then you can invest in corporate bonds (company securities). In conditions economic instability it is better to choose securities of the most famous and large companies, such as Gazprom, Rosneft, Sberbank, VTB, Severstal, etc.
But there is one "but". From the income received, you will have to deduct not only the commission to the broker, but also the personal income tax of 13%, which is subject to interest on bonds.
There is one hack. For bonds issued no earlier than 2017, it will be possible not to pay personal income tax, but only on the coupon that will be credited to the investor's account from January 1, 2018. If you buy a bond under these conditions, then the yield on it will be practically equal to the coupon rate. For example, the other day Gazprombank placed three-year bonds at a rate of 8.65% per annum. That is, by investing 100 thousand in a bond with such a rate, you will receive in a year, minus the broker's commission, an income of 8400-8500 rubles. or about 8.4-8.5% per annum.
Yield: 8.4-8.5% per annum
Entry threshold: 1,000 rubles
People's bonds
In the spring, the Ministry of Finance launched a special tool - simplified so-called people's federal loan bonds or OFZ-n. The rate on them is even higher than on ordinary OFZs and amounts to 8.5% per annum. Such securities are usually placed for three years. Coupon income on them is also not taxed. However, an additional commission will have to be paid to banks that act as sales agents. Moreover, this commission is the more, the less invested amount. When purchasing securities for less than 50 thousand rubles, the commission will be 1.5%. If 50-300 thousand rubles - 1%, more than 300 thousand rubles - 0.5%. In addition, banks may take a commission for early redemption of the bond, and early redemption may result in losing part of the accumulated coupon income. However, if you hold the paper until the end of the term, 100 thousand rubles invested in these bonds, you will eventually receive an income of 8.4% per annum minus a commission to the bank or 8400 rubles.
Yield: 8.4% per annum
Entry threshold: 30,000 rubles.
How to buy?
People's bonds can only be bought at the offices of Sberbank and VTB24. Other bonds can be invested in 3 ways.
1. Open a brokerage account
You can buy bonds by opening an account with brokerage company. To do this, you must first choose a broker. Full list can be viewed on the website of the Moscow Exchange.
A passport is required to conclude a contract. The broker will open a brokerage account and help you install a trading program on your computer, as well as explain how to buy a particular security.
The broker earns on client commissions from trading operations. In order not to overpay, you must ask to choose a tariff for specific needs. Inform that you intend to make the minimum number of transactions, that is, to buy, and in a year or two to sell paper. The bond can be purchased through Personal Area after the trading application is installed on your computer, following the instructions of the broker. When you decide to withdraw funds, inform the broker about this desire. The money will be transferred from a brokerage account to a bank account, and from there they can be withdrawn at the cash desk or through an ATM.
The commission for the purchase/sale of bonds is from 0.025% of the transaction amount. You also need to pay 100-177 rubles. per year for the storage of securities in the depository. An additional small amount will have to be paid for the withdrawal Money(about 10-50 rubles). The amount of commissions depends on the broker and the amount of transactions.
2. Open IIS
An individual investment account (IIA) is a kind of brokerage account, but it was conceived by the authorities so that ordinary citizens (like you and me) would start buying stocks and bonds. For this, the state has come up with benefits for those who open IIS. The rules are as follows: if you put up to 400 thousand rubles into your account. and do not withdraw funds within 3 years, then you will receive a tax deduction in the amount of 13% of the amount in the account. The deduction can be obtained already in the first year by submitting a declaration to the tax office.
Such an account can also be opened through a broker. There is a limit on the number of IIS - one account per person. You can put up to 1 million rubles on IIS, but you will receive a deduction only from 400 thousand rubles. True, in a year you can report another 400 thousand and get another deduction. However, the second amount must also be kept on the account for 3 years from the date of enrollment, etc. If within three years you still withdraw funds, the deduction will have to be returned to the state.
“In addition to OFZ coupon income, which is not subject to personal income tax, an investor can receive a tax deduction in the amount of 13% of the amount deposited on IIA. Thus, only for the first year of owning OFZ on IIA, you can get about 21% per annum. Of course, in a year, the profitability will decrease, because it will not work to receive a tax deduction every year for the amount previously paid. And yet, the profitability of investing in OFZ through IIS exceeds the best bank offers for deposits, ”explains Alexander Dubrov, head of the Internet trading department at Otkritie Broker.
Not only government bonds, but also corporate papers can be placed on IIS. However, on the one hand, you can get a tax deduction on them, on the other hand, you will have to pay personal income tax on coupon income.
3. Buy mutual funds
If you do not want to understand trading programs or look for the right paper, you can invest in bonds through a management company (MC). To do this, it is enough to buy a share in a mutual fund (mutual investment fund). A mutual fund is a large portfolio with bonds of companies from different industries. The manager will take care of all the headaches.
The managers themselves claim that investing in bonds through them is not only more convenient, but also more profitable than on their own, because a professional looks after the funds.
“Last year was very successful for the bond market, and the yield on bond mutual funds amounted to 13-14%,” says Andrey Shenk, an analyst at Alfa Capital.
However, not a single manager can promise a guaranteed return, so you can earn on a mutual fund both more and less than on independently purchased bonds.
Commissions must be deducted from the amount of income, which in the case of management companies are much higher than in the case of brokers. A management fee is added (1-2% of the fund's assets), discounts / premiums that are paid by the investor at the time of purchase / redemption of the fund's shares. In total, about 1.5-2% more will have to be taken away from the profit received for the management and redemption of the share. However, a share can also be put on IIS and receive a tax deduction in the amount of the same 13% per annum.
conclusions
Simple arithmetic shows that investing in bonds more profitable than deposits. Having studied this tool, you can get a yield of more than 12% per annum. To do this, you will have to open a brokerage account, research the market and pay commissions for the services of brokers, and sometimes income tax.
Investors received a pleasant gift from the state - taxation of ruble bonds called with bank deposits. From January 1, 2018, pay tax on the coupon (interest) on new issues corporate bonds no longer needed, as with interest on deposit. The benefit is valid provided that the bonds have been issued since January 1, 2017, and the interest rate does not exceed the value key rate Bank of Russia, increased by five percentage points.
Let's figure out what this means for investors, what benefits they get, and in which securities it is better to invest money.
How to Avoid Paying Bond Taxes Legally
President Vladimir Putin ordered to attract citizens to the bond market in December 2015. In a message to the Federal Assembly, he proposed to release from bond coupon income tax to make it profitable for citizens to invest in the development of the domestic real sector.
In 2017, the long-awaited law was finally passed. He installed preferential taxation for ruble corporate bonds, which are circulating and issued since January 1, 2017. Now the tax authorities do not care whether a citizen places money in a deposit or invests in preferential bonds, they have the same taxation.
If you keep your money in soft bonds to maturity, as in a contribution, then you don’t need to pay any taxes at all. New law abolished 13% income tax from discount to face value upon redemption.
Prior to the adoption of the law, private investors received tax benefits only when investing in state, subfederal and municipal bonds. They also do not need to pay coupon tax, however, you still have to pay tax on income received when buying such bonds at a discount when they are redeemed.
Personal income tax rate
Comparison of ordinary and concessional bond yields
The abolition of the coupon tax increased the attractiveness of investing in bonds compared with deposits. The difference in effective interest rates between a three-year deposit with Sberbank (5.36% per annum) and Sberbank bonds due in December 2020 (7.35%) is now 2 percentage points.
FROM tax deduction according to IIS in the amount of 52,000 ₽ for the amount of 400,000 ₽, investments in state bank bonds are twice as profitable as its contribution. By three-year bonds of Sberbank 001-03R you can get 11.7% per annum.
Maintenance costs individual investment account in the amount of 49.9 ₽ per month reduce the profitability of these investments slightly. According to the calculator of the Home Credit Bank, taking into account the commission Yango service, the investor's return will decrease by only 0.14% percentage points.
It is interesting to see how concessional bonds more profitable than ordinary ones issued before January 1, 2017. The infographic below shows with the purchase of IIS preferential three-year bonds of Sberbank 001-03R in the amount of 400,000 rubles in January 2018.
Estimated website, three-year Sberbank bonds after the removal of the coupon tax, they actually give the investor a yield of about 1 percentage point more. If you hold bonds to maturity and reinvest coupons at the same rate, the investor's income will be 46,120 ₽ per year. With the coupon tax, this income would be ₽4,120 less.
In theory, market participants can include this benefit in the current soft bond yield, which will decrease. However, the share of individuals bond market small, so nothing like this happens.
According to Moscow Exchange, in December 2017, the share of individuals in secondary trading corporate bonds amounted to 4.4%. This figure quadrupled in one year, thanks in part to cancellation income tax for a coupon.
Sberbank 001-03R in the amount of 400,000 rubles with IIS
Which bonds without taxes are better to choose?
To choose profitable bonds without tax on your own, you need to take into account several nuances:
tax incentives apply only to ruble bonds Russian organizations . Currency bonds and bonds of companies registered abroad, as well as shares investment funds bonds And structural receipts are not subject to the law.
concessional bonds should trade on the stock exchange. tax incentives no over-the-counter bonds, which are not included in the list of those admitted to exchange trading, that is, they do not have listing. For example, from income from investments in commercial bonds you have to pay all taxes.
Preferential bonds must be issued from January 1, 2017. To calculate taxes for individuals, the Ministry of Finance of Russia considers the issue date to be the day when placement of bonds.
The discount is valid only if the amount of the coupon (percentage) does not exceed the value key rate of the Bank of Russia increased by five percentage points. If more, then a tax of 35% will have to be paid on the difference between the interest and the ceiling.
Max Level tax-free interest calculated at the key rate of the Bank of Russia valid at the moment of coupon payment. In January 2018, the key rate is 7.75% per annum, maximum size coupon without tax - 12.75% per annum.
More than half of the bonds in the application - with a tax-free coupon
What to do with investments in bonds without tax benefits?
IN Yango app users have access to bonds with coupon " tax free» reliable issuers from different sectors of the economy with different maturity. If we focus on investing in such corporate papers, you can increase the yield of your bond portfolio as a whole. However, there are a few situations where you can take your time to shake things up. investment portfolio.
Please tell us about the high-yield bond sector in Russia. Does it make sense to invest? To what extent is the risk covered by the premium? What industries should be considered? Or maybe with the same yield it would be less risky to invest in stocks?
Where do high yield bonds come from?
Such debt securities issued by small companies. Bonds - good way obtain financing if the company is unwilling or unable to take out a bank loan.
In order for investors to want to invest in bonds of a small company, higher returns are needed. Generous coupons are a premium for the risk of losing money.
Here are examples of such bonds.
Solid-leasing-BO-001-01, RU000A0ZZEA0. Coupon yield - 13% per annum with payments every three months, current yield - slightly less than 13%, yield to offer - almost 13.7%.
Butcher-BO-P01, RU000A0ZZAE0. Coupon yield - 13.5% with payments once a month, current yield - about 13.5%, yield to offer - almost 13.6%.
Truckoff-center-BO-P01, RU000A0ZZ0R3. Coupon yield - 17% with payments once a month, current yield - more than 16.5%, yield to offer - about 14.5%.
Also, high-yield bonds can be securities of companies that have serious problems. The coupons are not very large, but the bonds become much cheaper - their current yield and yield to maturity increase if you buy securities at a reduced price.
Of course, it is not a fact that these troubled papers will eventually bring at least some profit. You can earn a lot, you can lose everything.
Bond risks
The reliability of bonds is equal to the reliability of their issuer. Corporate bonds are considered more risky than government bonds. Even highly rated papers can become problematic.
The company may default and not pay the coupons on time, or not pay them at all, or refuse the promised offer, or not return the face value of the bond. So investors can get less than they expected, or completely lose funds.
According to Rusbonds.ru, from January 1, 2010 to October 23, 2018, there were several hundred corporate bond defaults. For a significant part of these securities, the obligations have not been fulfilled.
For comparison: during this period there was not a single OFZ default. There were two technical defaults on municipal bonds, but both times investors received their coupons, just a little later.
Important nuances
Personal income tax is withheld from coupon income on corporate bonds - 13%. If the bond is issued in 2017 or later, then the tax will be 35%, but not on the entire coupon, but only on the part that exceeds the Central Bank rate, increased by 5 percentage points. Keep this in mind when planning your investments.
High-yield bonds are issued in small volumes and are less popular than the same OFZ. So it is possible
What to do and how to reduce risks
Invest in such securities, limit yourself to OFZ or build a portfolio of different types assets - each investor decides for himself, based on his goals and risk appetite.
I believe that novice investors should not invest in high-yield bonds: the chance of losing money is too great. It is better to use OFZ: together with the deduction for IIS contributions, they give nice results and quite safe.
If you decide to take the risk and invest in high-yield bonds, I advise you to take these precautions:
- Before buying bonds, study what the issuer does and what kind of financial position: is there a net profit, what debts, are there any court cases with his participation. Issuers' websites, a corporate information disclosure center, and a filing cabinet of arbitration cases will come in handy for this.
- Invest in bonds of various issuers. Bonds of ten companies are more reliable than bonds of one company of the same level.
- Do not chase the most profitable papers. The higher potential return, the higher the risk.
- Invest in high-yield bonds only the amount that you do not mind losing.
To better understand the topic of bonds, read these articles:
If you have a question about investments, personal finance or family budget, write: [email protected] We will answer the most interesting questions in the magazine.
Any investor, as an individual, in search of a conservative income that does not require him to be active in trading, sooner or later comes to the issue related to the purchase of bonds.
Before I light up possible ways buy bonds to an individual and , let's look at the mechanism of operation of these securities.
Bonds are a form of lending.
That is, when a company or state want to take out a loan they don't have to go to another credit institution. It is enough to issue the required number of bonds. All those who buy these securities will act as creditors for the issuer. Moreover, they will even receive interest for holding these assets. This type of investment is very similar to Bank deposit, only, unlike the bank, the money is sent to live business support.
How can I buy bonds
Conducted on the stock section of the exchange. Before buying bonds to an individual, you need to understand that all exchanges work only with legal entities, namely with banks that already issue brokerage licenses. Thus, individuals can only buy bonds through a broker - a special intermediary company.
- Bonds can be denominated in a variety of currencies. The regional markets are dominated by debt securities denominated in national currency.
- There is also the so-called Eurobond sector. Debt securities circulating in this section are denominated in currencies other than the national ones. Most often it is the US dollar or the euro.
At this moment Fed USA and ECB pursue a policy of quantitative easing. What does this mean and how does this fact affect the Eurobond market?
In fact, the current rate in the US and the EU does not allow banks to pay interest to their depositors in any way, exceeding 1% per annum. More often good bet on contribution to developed countries is 0,7-1,2% . Naturally, investors who are looking for a conservative income in the currency will actively invest either inshares, or in Considering that the shares of American issuers do not bring good dividends, and earnings on market value exchange rate is always associated with risk, then Eurobonds are the preferred option for a conservative investor.
Exactly foreign investors create the bulk of liquidity on Eurobonds.
Besides, government bonds or Bonds Federal Loan can also be nominated both in national currency and in foreign. However, yields on sovereign bonds are too low, so corporate debt remains the preferred option.
How to buy bonds for a private person
If we talk about buying bonds, then first of all, before buying bonds, an individual must have a brokerage account opened with a company that works with bonds and provides access to such markets.
How to buy federal loan bonds for an individual
As you can see, an individual can buy not only Eurobonds, European and American, but also Federal Loan Bonds (OFZ). In order to do this, you just need to find a suitable broker, register and replenish your personal account, and then in trading platform to make a purchase.
Bonds that are denominated in the national currency are traded in the same way as . They can be bought or sold through the trading program or by phone call. You can also build a visual chart of price changes and open a trading glass.
Eurobonds are traded in a slightly different way.
You can not open the terminal and buy them at the moment. A purchase order is made through the client manager of the brokerage company. Then a call is made to the company's trader at his workplace, and he is already advising the client at what price one or another Eurobond can now be bought.
Unlike ruble bonds, foreign currency debt securities require a much larger amount initial capital. This is due to very large lots, which these Eurobonds are traded in.
At the moment, you can start buying from $10,000.
For the ruble market, the same figure is relevant, but in rubles. The yield of Eurobonds varies greatly from issuer to issuer, so it is impossible to give an exact figure. In the current economic situation, there spread from 3% to 30% per annum. Naturally, one can safely add to this the growth of the exchange value of the dollar or the euro.
Bond taxes
Key tax rate for individuals in Russian Federation there remains a fee of 13% - including these taxes are also collected from income from activities in the stock market.
Bonds are no exception in this case. Taxes are calculated by subtracting all expenses from income. The costs include, among other things, brokerage commission and depository costs. Everything that remains in the balance is subject to collection. But each rule has its own exceptions, which only confirm the rule's work. In this case, they refer to dividends and coupons on government municipal bonds.
When with corporate bonds the tax is also 13%. Keeps him in charge tax agent, i.e broker. Securities are also divided into circulating on the stock market and non-circulating. This is important to consider because they refer to different tax bases and cannot be balanced.
It is worth considering separately payment of personal income tax with NKD.
- When paying a coupon by a company, a tax of 13% is charged.
- Coupon balancing occurs when funds are withdrawn from the brokerage account, or when the tax period ends.
The tax period in Russia is a calendar year, and the direct withholding of tax is made in January of the following year.
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For those who read a lot and count well
It can be seen from the card that Tinkoff BO-7 is an issue of ruble bonds with a face value of 1,000 rubles with a semi-annual coupon. That is, you can give money to Tinkoff Bank in multiples of 1,000 rubles, and the bank will pay debts every six months.
The rate of the first three coupons is set at 11.7% per annum, or 58.34 rubles. That is, for every 1,000 rubles, Tinkoff Bank will pay you 58.34 rubles every six months.
The bonds will mature in June 2021. However, at the end of the third coupon period, which ends on December 28, 2017, it is possible to early repayment if you want it. In the card, the opportunity is indicated by the word put in the line of the third coupon. Here's how it's worded in the documentation:
"The issuer will be obliged to purchase exchange-traded bonds according to the requirements of their owners, declared during the last five business days of the third coupon period."
The possibility of early repayment is called an offer or a put option.
Thanks to the offer, the five-year issue becomes a two-year issue. That is, the owners of Tinkoff BO-7 bonds can receive their money not in 2021, but already in 2017, if they want.
Before the offer comes, the bank will announce the rate of the next coupons. If the rate is attractive, then the bonds can not be redeemed, but kept on.
What is an offer or put option?
Many Russian corporate bonds have put options. This means that in a certain period the bondholder has the right to present the bonds for redemption at face value. That is, ahead of schedule to return to himself the money that he, as it were, lent.
Most often, the issuer grants such a right when the coupon rate has not been determined for all coupon periods. As in the case of Tinkoff Bank: for the first three coupons, it guarantees a rate of 11.7% per annum, and we'll see what happens next in a year and a half.
When the issuer announces a new batch of rates, they may not be profitable for the holder. In such a case, the holder should be able to exit the game. That's what offers are for.
There are issues in which all coupons are known, but offers are still provided. This is done to reduce the risks of bondholders and thus make the bonds more attractive. The risk is reduced because if the rate falls below the market rate, then the holders will be able to present the bonds for redemption.
How you will redeem your bonds under the offer depends on your broker. For some, the procedure costs about 1000 rubles, but the broker does everything for you. For others, the procedure is free, but you need to notify the issuer yourself that your bonds need to be redeemed. Then, on the appointed day, in a special window in the exchange terminal, make a deal with a special agent.
In addition to the broker's commission, a depository commission may also appear - the company that, as it were, stores your securities. The amount of such a commission cannot always be known in advance, but it is comparable to the price of presentation for redemption through a broker.
Yield
For a private investor, the yield on bonds on the exchange will never be equal to the coupon yield. The fact is that the rate on the market is constantly changing, and after them the price of bonds is changing. I talked about the impact of price on profitability
You can find out the current price and profitability on the exchange. To do this, we look at the prices and profitability of previous transactions or existing orders. Roughly speaking, under what conditions are bonds now traded in fact, and not on paper.
In my QUIK exchange terminal, there is a table with twenty best buy and sell orders. Red lines - sale, green lines - purchase:
The price in the picture the best offer for sale - 100.80%. The yield calculated by the exchange at this price is 11.21%. This means that the purchase and holding of these bonds to maturity under the offer will bring 11.21% per annum.
Bond yield calculated by the exchange
In the article "", for simplicity of presentation, I calculated the so-called simple profitability. By analogy with a deposit, this is the return on a deposit without interest capitalization.
But the Moscow Exchange calculates the so-called effective yield. The effective yield is the yield, taking into account the reinvestment of coupons at the same rate at which the original investment was made. Continuing the analogy with a deposit, this is a deposit with interest capitalization. Profitability with capitalization is greater.
The calculation of effective yield is based on a number of assumptions. For example, that you can reinvest coupons at the same rate. In practice, this is not always feasible: the rate may change, your coupon payments with a small package may not be a multiple of the purchase price of the bonds.
Also, the effective yield is considered relative to the price offered on the exchange, and not nominal. If you remember, the bonds of Tinkoff Bank at issue had a yield of 11.7%, and now we see a yield of 11.21%. Where did the 0.49% go? To understand this, you need to look at the price at which this bond is sold: 100.80% of the face value. That is, a bond with a face value of 1000 rubles is sold for 1008 rubles. This overpayment reduces the effective yield.
If you want not to overpay and increase yields, you will need to buy bonds at a lower price, but there must be some good reasons for this - for example, a sharp change in rates in the economy. Read more about this in the Market Risk section.
One way or another, the exchange calculates the effective yield, and this must be taken into account when evaluating.
Having learned the yield of a bond issue at the price on the stock exchange, we need to somehow evaluate whether this is a good yield and whether it is worth buying such bonds. Usually in this case, bonds are compared with government bonds.
For comparison, the issue of OFZ 25081 with a fixed coupon and redemption in January 2018 is suitable for us. The current yield of this OFZ issue is 8.8%, which is lower than that of Tinkoff BO-7. It turns out that the bonds of Tinkoff Bank are more profitable than the bonds of the Ministry of Finance.
The difference in yield between the Ministry of Finance and Tinkoff Bank is explained by different credit risk. Tinkoff Bank has a higher risk.
Credit risk
Credit risk is the risk of default by the issuer, that is, the risk that the company will stop paying coupon payments or will not return the body of the debt - the face value of the bond.
You can quickly assess the credit risk by the credit rating of the international rating agency. Ratings are assigned to issuers, but individual bond issues may have their own ratings. The presence of a rating of an international agency already indicates a certain minimum quality and size of the issuer's business.
Tinkoff Bank, according to its website, has a speculative rating of BB− with a neutral outlook from Fitch and a speculative rating of B1 with a neutral outlook from Moody's.
Due to the higher credit risk the yield on bonds of Tinkoff Bank is higher than on OFZ. The difference in returns is the risk reward that investors receive.
How credit risk is realized
An example of the implementation of credit risk is the story of the bank "Peresvet".
In early October 2016, the Fitch agency pointed out some risks to the bank, and the credit rating was not downgraded.
On October 13–14, news broke that the chairman of the board of the bank had disappeared. The Central Bank, which usually does not comment on the work of existing banks, issued a reassuring statement. Around the same time, a landslide drop in prices for Peresvet bonds began.
Prices for Peresvet bonds collapsed for obvious reasons - investors lost faith. Belief that the bank will pay off its debts.
As I write this, Peresvet bonds are trading at 280 rubles per 1,000 face value with a yield of approximately 380% per annum:
If the Central Bank revokes the license of the bank, then the circulation of bonds on the stock exchange will be terminated. After that, there will be nowhere to find out the price - the further fate of the invested money will no longer concern the exchange.
Another striking example from the past is the termination of Transaero, whose bonds are now trading at 20 rubles per 1,000 rubles of face value, that is, two kopecks per ruble:
Compared to Transaero, Peresvet's bonds are still very expensive.
Market risk
In addition to credit risk, there is also market risk. This is the risk of changing the situation on financial market, in particular - the risk of change interest rates in economics.
This risk affects both government and corporate bonds equally. It is connected with rates in the economy: if they fall, then bonds rise in price, and yields fall. And vice versa.
How market risk is realized
Let's imagine that on October 31, 2014, we invested in government bonds with a maturity of one year and the current yield of 9.5%.
Just a month and a half later, on Black Tuesday, December 16, 2014, the Russian Central Bank, against the backdrop of a massive devaluation of the ruble, simultaneously raises key rate immediately by 6.5 percentage points to 17% per annum.
The key rate, among other things, affects deposit rates and the profitability of many other financial instruments. You used to have, roughly speaking, deposits at 9% and bonds at 9.5%. And now - deposits at 18% and bonds at 9.5%. Bonds with such a yield become sharply unprofitable.
If we want to sell our bonds now, we need to offer the market some competitive conditions, that is, to catch up with 18% yield. This can be done either by changing the amount of the coupon - that is, paying more on the debt - or by changing the value of the bond itself.
We cannot change the coupon amount, because we are not the Ministry of Finance. But we can change the value of the bond, that is, we can sell it cheaper than we bought it. Roughly speaking, we bought for 999 rubles, and we will sell for 990. By lowering the price, we are catching up with competitive profitability.
As a result: the rate has increased, the competition of financial instruments has intensified. If we sell our bonds now, we will have to lose money.
Another option is to hold bonds until maturity. That is, wait until the payback period comes, the Ministry of Finance will pay us the last coupon and return 1,000 rubles for each bond. But the yield of 9.5% per annum by the time of redemption may be lower than the market.
Maybe the opposite situation: in the same December 2014, people with strong nerves could buy already familiar to us. This means that such yield will be all the way up to maturity. Compared to the current 9% yield, this is generous.
I considered the example of government bonds because historical data on government bond yields are readily available on the Moscow Exchange website. The same thing happened with corporations.
Yield after taxes
The effective yield of Tinkoff BO-7, according to the exchange's calculations, was 11.21%. However, unlike government bonds, corporate coupons will have to pay personal income tax (personal income tax). Taxes will be deducted by the issuer or depositary, and the coupon will come to you already cleared of taxes. And this radically changes the picture.
Behind deduction of personal income tax the effective yield of Tinkoff BO-7 will be about 9.20% per annum, and the simple yield - 8.63% per annum. Thus, the personal income tax brings the yield of the Tinkoff BO-7 corporate issue sharply closer to the yield of state OFZ 25081. At the same time, the difference in risks is significant.
Don't forget about deposits. Depending on the terms of replenishment and capitalization, the rate on a deposit in Tinkoff-Bank for the same 14 months will be from 6.69 to 8.29% per annum.