High yield corporate bonds. Investing for Dummies: How to Buy Bonds
Bonds are the closest alternative to bank deposits in the stock market. These are securities (debentures of companies or the state), which work approximately on the same principle as a bank deposit. You buy a bond for 100 rubles, and after 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 once a quarter, half a year or a year. When buying bonds with a par value of 100 rubles. for 100 rubles. 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 a management company, by purchasing a share in a mutual fund.
Bonds are issued for a specific period. It can be 1, 2, 3 years or more. If you decide to sell bonds ahead of schedule, for example, after six months, then in case 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 decline. 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. bond six months after the purchase, amid negative news, you can miscalculate. You, of course, will receive all the interest on it for 6 months, that is, 5 rubles, but the cost of the security itself may fall to 95 rubles. It is for this amount that it can be sold. In the end, at best, you will stay with your own people.
But if the situation changes in your favor and, for example, the United States lifts sanctions on Russia, the value of bonds, on the contrary, will rise, and you can sell it, for example, for 105 rubles, and again get your interest in the amount of 5 rubles. However, we repeat, you can guarantee to return your 100 rubles plus 10% per annum only when the previously agreed release date passes.
Unlike a bank deposit, where the state guarantees the return of 1.4 million rubles. in case of bank closure, the return of funds on the bond is guaranteed only by the one who issued the 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 the bonds?
Government bonds
This is one of the safest ways to invest money. This option is interesting, first of all, for those who like to keep funds in Sberbank, where the rate on a deposit for a period of a year or three is 5-6% per annum, and on a deposit with the possibility of replenishment and partial withdrawal without loss of interest is equal to 1.5-2.3%. At the same time, the yield of OFZ (federal loan bonds) is about 8%, the interest on 2-year OFZ is about 8.12% per annum. The state acts as the guarantor of the money back, so you can safely invest more than 1.4 million rubles in OFZ.
If you want to get a higher yield, then you can purchase municipal or regional bonds that are issued by a major city or region. The coupon yield on such bonds is higher than on OFZ bonds, and it is also not subject to income tax. But here the risks are higher, because a separate region can theoretically declare itself bankrupt, so it is better to choose the largest megacities and rich regions, such as Moscow, St. Petersburg, Yekaterinburg, etc. A nice bonus - income from government bonds is not taxed.
Profitability: up to 7.5-8.5% per annum
Entry threshold: 1,000 rubles (this is 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 of 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 broker's commission, but also the personal income tax 13%, which is imposed on the interest on bonds.
There is one life hack. For bonds issued not earlier than 2017, it will be possible not to pay personal income tax, but only according to the coupon that will be credited to the investor's account from January 1, 2018. If you buy a bond on these conditions, then the yield on it will be almost equal to the coupon rate. For example, the other day Gazprombank placed three-year bonds at the 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.
Profitability: 8.4-8.5% per annum
Entry threshold: 1,000 rubles
People's bonds
In the spring, the Ministry of Finance launched a special instrument - 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 papers are usually placed for three years. The coupon income on them is also not taxed. However, additional commission will have to be paid to banks that act as sales agents. Moreover, this commission is the greater, the less the invested amount. When purchasing securities in the amount of 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 can take a commission for the early presentation of the bond for maturity, and in the event of early redemption, you can lose part of the accumulated coupon income. However, if you hold the paper until the end of the term, the 100 thousand rubles invested in these bonds, then in the end you will receive an income of 8.4% per annum minus the bank's commission 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. The rest of the bonds can be invested in 3 ways.
1. Open a brokerage account
You can buy bonds by opening an account with a brokerage company. To do this, you must first select a broker. The full list can be viewed on the Moscow Exchange website.
A passport is required to conclude a contract. The broker will open a brokerage account and help install the trading program on the 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 the security. The bond can be purchased through your personal account after the trading application is installed on your computer, following the broker's instructions. When you decide to withdraw funds, inform the broker about this desire. The money will be transferred from the brokerage account to the bank account, and from there they can be withdrawn at the cash desk or through an ATM.
The commission for buying / selling bonds is from 0.025% of the transaction amount. You also need to pay 100-177 rubles. per year for keeping securities in a depository. An additional small amount will have to be paid for withdrawing funds (approximately 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 type of brokerage account, but it was conceived by the authorities so that ordinary citizens (such as you and I) began to buy stocks and bonds. For this, the state has come up with benefits for those who open the IIS. The rules are as follows: if you have deposited up to 400 thousand rubles. and do not withdraw funds within 3 years, then you will be refunded a tax deduction of 13% of the amount on the account. The deduction can be obtained in the first year by filing a declaration with the tax office.
Such an account can also be opened through a broker. There is a limitation on the number of IIS - one account per person. You can put up to 1 million rubles on the IIA, 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 the OFZ coupon income, which is not subject to personal income tax, an investor can receive a tax deduction of 13% of the amount deposited on the IIA. Thus, only for the first year of ownership of OFZ on IIA, you can get about 21% per annum. Of course, in a year the profitability will decrease, because it will not be possible to receive a tax deduction every year for the previously deposited amount. And yet, the profitability of investing in OFZs through IIS exceeds the best bank offers on deposits, ”explains Alexander Dubrov, head of the Otkritie Broker Internet trading department.
On the IIA, you can put not only government bonds, but also corporate securities. However, on the one hand, you can get a tax deduction for them, on the other hand, you will have to pay personal income tax on the coupon income.
3. Buy mutual funds
If you do not want to understand trading programs or look for the right security, 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 various industries. The manager will take care of all the headache.
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 was 13-14%,” says Andrey Shenk, an analyst at Alfa-Capital.
However, not a single manager can promise guaranteed profitability, so you can earn both more and less money on a mutual fund than on self-purchased bonds.
From the amount of income, you need to subtract commissions, which in the case of management companies are much higher than in the case of brokers. A management commission is added (1-2% of the fund's assets), discounts / surcharges, which are paid by the investor at the time of purchase / redemption of fund shares. In total, about 1.5-2% will have to be subtracted from the profit received for the management and repayment of the share. However, a share can also be put on the IIA and receive a tax deduction of the same 13% per annum.
findings
Simple arithmetic shows that investing in bonds is more profitable than deposits. Having studied this tool, you can get a yield of more than 12% per annum. To do this, you have to open a brokerage account, research the market and pay commissions for brokerage services, and sometimes income tax.
Investors received a pleasant gift from the state - taxation of ruble bonds equaled with bank deposits... From January 1, 2018 to pay tax on coupon (interest) on new issues corporate bonds no longer needed, as with interest on deposit... The privilege is valid provided that the bonds were issued from 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 receive, and in which securities it is better to invest.
How not to pay taxes on bonds legally
The instruction to attract citizens to the bond market was given by President Vladimir Putin in December 2015. In a message to the Federal Assembly, he proposed to exempt from bond coupon taxto 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 established preferential taxation for ruble corporate bondswhich have been in circulation 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.
Keeping money in preferential bonds until maturity, as in the deposit, you don't need to pay any taxes at all. The new law abolished 13% income tax from discount to par at maturity.
Before the law was passed, private investors received tax benefits only when investing in government, sub-federal and municipal bonds... They also do not need to pay coupon tax, however, you will 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 yields on conventional and preferential bonds
The abolition of coupon tax increased attractiveness of investments in bonds compared with deposits... The difference in effective interest rates between a three-year deposit in Sberbank (5.36% per year) and sberbank bonds maturing in December 2020 (7.35%) is now 2 percentage points.
WITH tax deduction for IIS in the amount of 52,000 rubles in the amount of 400,000 rubles investments in the bonds of the state bank 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 rubles per month reduce the profitability of these investments insignificantly. According to the Home Credit Bank calculator, including commission yango service, the investor's return will decline by only 0.14% percentage points.
It is interesting to see how preferential bonds more advantageous than the usual ones issued before January 1, 2017. The infographic below shows a preferential purchase on the IIS three-year bonds of Sberbank 001-03R in the amount of 400,000 ₽ in January 2018.
According to calculations site, three-year sberbank bonds after the abolition of the coupon tax, in fact, they give the investor about 1 percentage point more profitability. If the bonds are held until maturity and the coupons are reinvested at the same rate, the investor's income will be RUB 46,120 per year. With the coupon tax, this income would be RUB 4,120 less.
In theory, market participants can lay this benefit in the current yield on preferential bondswhich will decline. However, the share of individuals on bond market is 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%. Over the year, this figure has quadrupled, thanks in part to cancellation of income tax on coupons.
Sberbank 001-03R in the amount of 400,000 rubles with IIS
![](https://i2.wp.com/yango.pro/upload/medialibrary/27b/27b5a9ccc708845ac9aaca72b8943a0e.jpg)
Which tax-free bonds are best for you?
In order to independently choose profitable bonds without tax, you need to consider several nuances:
Tax incentives apply only to ruble bonds of Russian organizations... Foreign exchange bonds and bonds of companies registered abroad, and bond mutual funds and structural receipts do not fall under the law.
Concessional bonds must go to the exchange... There are no tax benefits over-the-counter bondsthat are not included in the list of admitted to exchange trading, that is, do not have listing... For example, from income from investments in commercial bonds 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 date of issue to be the day when placement of bonds.
The discount is valid only if the amount of the coupon (interest) does not exceed the value key rate of the Bank of Russia, increased by five percentage points. If more, then the difference between the interest and the maximum level will have to pay a tax of 35%.
Maximum level tax-free interest calculated at the key rate of the Bank of Russia in effect at the moment of coupon payment. In January 2018, the key rate is 7.75% per annum, the maximum coupon size without tax is 12.75% per annum.
More than half of the bonds in the app - with a coupon without tax
![](https://i1.wp.com/yango.pro/upload/medialibrary/8c4/8c4a0884b2990656ae45112c44b35977.jpg)
What to do with investments in bonds without tax breaks?
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 profitability of your bond portfolio as a whole. However, there are several situations where you can take your time to shake up investment portfolio.
Please tell us about the high yield bond sector in Russia. Does it make sense to invest? How much risk is covered by the premium? Which industries are worth considering? Or maybe with the same profitability it will be less risky to invest in stocks?
Where High Yield Bonds Come From
Such debt securities are issued by small companies. Bonds are a good way to get financing if a 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, an increased yield is needed. Lavish coupons are a premium for the risk of losing money.
Here are examples of such bonds.
Solid-leasing-BO-001-01, RU000A0ZZEA0. The coupon yield is 13% per annum with payments every three months, the current yield is slightly less than 13%, the yield to put is almost 13.7%.
Myasnichy-BO-P01, RU000A0ZZAE0. The coupon yield is 13.5% with payments once a month, the current yield is about 13.5%, the yield to put is almost 13.6%.
Gruzovichkof-center-BO-P01, RU000A0ZZ0R3. Coupon yield - 17% with payments once a month, current yield - more than 16.5%, yield to put - about 14.5%.
Also, securities of companies that have serious problems can become high-yield bonds. Coupons are not very big, but bonds are getting much cheaper - their current yield and yield to maturity increase if you buy securities at a reduced price.
Of course, it's not a fact that these troubled securities will ultimately 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 securities are considered more risky than government securities. Even highly rated securities can become problematic.
The company may default and fail to pay coupons on time, or fail to pay them at all, or refuse the promised offer, or fail to return the bond's face value. So investors can get less than they expected, or completely lose their funds.
According to the Rusbonds.ru website, from January 1, 2010 to October 23, 2018, there were several hundred corporate bond defaults. For a significant part of these securities, the obligations were not fulfilled.
For comparison: during this period there were no OFZ defaults. 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 yield 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. Consider this when planning your investment.
High-yield bonds are issued in small volumes and are less popular than the same OFZ. Hence, it is possible
What to do and how to reduce risks
Invest in such securities, limit OFZ or build a portfolio of different types of assets - each investor decides for himself, based on his goals and willingness to take risks.
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 good results and are quite safe.
![](https://i2.wp.com/img-cdn.tinkoffjournal.ru/iis-max_minicover.scx5iom7zlbj.png)
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 is doing and what his financial position is: is there a net profit, what debts, are there any court cases with his participation. For this, sites of issuers, a center for disclosure of corporate information, a file of arbitration cases are useful.
- Invest in bonds of different issuers. Bonds of ten companies are more reliable than bonds of one company of the same level.
- Do not chase the most profitable securities. The higher the potential return, the higher the risk.
- Invest in high yield bonds only the amount that you do not mind losing.
For a better understanding of the subject of bonds, read these articles:
If you have a question about investments, personal finances 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 active trading from him, sooner or later comes to a question related to the purchase of bonds.
Before highlighting the possible ways to buy bonds for an individual and, let's look at how these securities work.
Bonds are a form of lending.
That is, when a company or state want to take a loan they do not have to go to another lending institution. It is enough to issue the required number of bonds. Everyone who buys 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 a bank, money is sent to live business support.
How can you buy bonds
It is conducted on the stock section of the exchange. Before you buy bonds natural person, 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 wide variety of currencies. The regional markets are dominated by debt securities denominated in the national currency.
- There is also the so-called Eurobond sector. This section deals with debt securities that are denominated in currencies other than national ones. Most often it is US dollar or euro.
Currently Fed USA and ECBare pursuing a quantitative easing policy. What does this mean and how does this fact affect the Eurobond market?
In fact, the current US and EU rate does not allow banks to pay fees to their depositors in any way, exceeding 1% per annum... Most often, a good deposit rate in developed countries is 0,7-1,2% ... Naturally, investors who are looking for a conservative income specifically in foreign currency will actively invest either inshares, or c. Considering that shares of American issuers do not bring good dividends, and earnings on the market value of the exchange rate are always associated with risk, then Eurobonds are the preferred option of a conservative investor.
It is foreign investors who create the bulk of liquidity on Eurobonds.
Moreover, government bonds or Federal Loan Bonds can also be nominated both in national currency and in foreign currency. However, the yield on sovereign bonds is too low, so corporate debt securities remain the preferred option.
How to buy bonds for an individual
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 fund your personal account, and then make a purchase in the trading platform.
Bonds that are denominated in local currency are traded in the same way as. They can be bought or sold through a trading program or by phone call. You can also build a visual chart of price changes and open a trading order book.
Eurobonds are traded in a slightly different way.
You cannot open the terminal and purchase them at the moment. The 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 already advises the client at what price one or another Eurobonds can now be bought.
Unlike ruble bonds, foreign currency debt securities require a much larger initial capital. This is due to the very large lots in which these Eurobonds are traded.
At the moment, you can start buying from 10,000 US dollars.
For the ruble market, the same figure is relevant, but in rubles. The yield of Eurobonds varies greatly from issuer to issuer, so an exact figure cannot be given. In the current economic situation, there is spread from 3% to 30% per annum. Naturally, one can safely add to this the growth of the exchange rate of the dollar or euro.
Bond taxes
The key tax rate for individuals in the Russian Federation remains a 13% tax - including these taxes are collected from income from activities in the stock market.
Bonds are no exception in this case. Taxes are calculated on the principle of deducting all expenses from income. The costs include, among other things, brokerage commission and depository costs. Anything that remains in the balance is subject to fees. 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 bonds.
When with corporate bonds the tax is still 13%. It is held by the responsible tax agent, i.e. broker... Also, securities are divided into traded on the stock market and not traded. This is important to take into account, since they belong to different tax bases and cannot be netted.
Separately, it is worth considering the payment of personal income tax with personal income tax.
- When the company pays the coupon, 13% tax will be charged.
- Coupon balancing occurs when funds are withdrawn from the brokerage account, or the tax period ends.
The tax period in Russia is considered to be a calendar year, and direct tax withholding is made in January of the following year.
If you find an error, please select a piece of text and press Ctrl + Enter.
15.11.16 143 458 1
For those who read a lot and count well
The card shows that Tinkoff BO-7 is the issue of ruble bonds with a par value of 1,000 rubles with a semi-annual coupon. That is, you can give Tinkoff Bank money in amounts that are multiples of 1000 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 1000 rubles, Tinkoff-Bank will pay you 58.34 rubles every six months.
The bonds will be redeemed in June 2021. However, at the end of the third coupon period, which ends on December 28, 2017, there is an early redemption option if you so desire. In the card, the opportunity is indicated by the word put in the line of the third coupon. And here's how it is stated in the documentation:
"The issuer will be obliged to purchase exchange-traded bonds at the request of their owners, declared within the last five business days of the third coupon period."
The possibility of early redemption is called an offer or put-option.
Thanks to the offer, the issue from a five-year period becomes a two-year one. That is, the owners of Tinkoff BO-7 bonds can receive their money not in 2021, but in 2017, if they want.
Before the start of the offer, the bank will announce the rate of the next coupons. If the rate is attractive, then the bonds may not be redeemed, but kept on.
What is an offer or put-option
Many Russian corporate bonds have offers, or put options. This means that during a certain period, the bondholder has the right to present the bonds for redemption at par. That is, early to return to himself the money that he seemed to have lent.
Most often, the issuer gives such a right when the coupon rate is not 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 what will happen next - we'll see in a year and a half.
When the issuer announces a new portion of the rates, they may turn out to be disadvantageous for the holder. In such a case, the holder should be able to exit the game. This is what offers are needed for.
There are issues for which all coupons are known, but offers are still provided. This is done to reduce the risks of bondholders and thus make bonds more attractive. The risk is reduced because if the rate falls below the market rate, then the bondholders will be able to present the bonds for maturity.
How you redeem your bonds under the put option depends on your broker. For some, the procedure costs about 1000 rubles, but the broker does everything for you. Others have a free procedure, 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 appear - the company that, as it were, stores your securities. The amount of such a commission is not always possible to know in advance, but it is comparable to the price of being presented for redemption through a broker.
Profitability
For a private investor, the yield on bonds on the stock exchange will never equal the coupon yield. The fact is that the rate on the market is constantly changing, and after them the price of bonds also changes. I talked about the effect of price on profitability
You can find out the current price and profitability on the stock 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.
My QUIK exchange terminal has a table with the twenty best buy and sell orders. Red lines - sell, green - buy:
In the picture, the price of the best offer for sale is 100.80%. The exchange's calculated yield at this price is 11.21%. This means that buying and holding these bonds until maturity under the offer will bring 11.21% per annum.
Bond yield calculated by the exchange
In article "" for simplicity of presentation, I calculated the so-called simple yield. By analogy with a deposit, this is the profitability of a deposit without interest capitalization.
But the Moscow Exchange calculates the so-called effective yield. The effective return is the return after reinvesting coupons at the same rate at which the initial investment was made. Continuing the analogy with a deposit, this is a deposit with interest capitalization. The return with capitalization is higher.
The calculation of the 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 for a small package may not be a multiple of the price of bonds to buy.
Also, effective profitability is considered relative to the price offered on the exchange, and not the nominal one. 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 0.49% go? To understand this, you need to look at the price at which this bond is being sold: 100.80% of par. That is, a bond with a face value of 1000 rubles is sold for 1008 rubles. This overpayment lowers the effective return.
If you want not to overpay and increase the yield, you will need to buy bonds at a lower price, but there must be some good reason for this - for example, a sharp change in rates in the economy. Read about this in the "Market Risk" section.
One way or another, the exchange calculates the effective profitability, 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 assess 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 maturity 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 profitability 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.
Credit risk can be quickly assessed using the credit rating of an international rating agency. Ratings are assigned to issuers, but individual bond issues may have their own ratings. The presence of a rating from an international agency already speaks of a certain minimum quality and size of the issuer's business.
Tinkoff Bank, according to its website, has a speculative BB- rating with a neutral outlook from Fitch and a speculative B1 rating with a neutral outlook from Moody's.
Due to the higher credit risk, the yield on Tinkoff Bank bonds is higher than on OFZ bonds. The difference in return is the risk reward that investors receive.
How credit risk is realized
An example of the realization of credit risk is the story of the Peresvet bank.
In early October 2016, Fitch pointed out some of the bank's risks, and the credit rating was not downgraded.
On October 13-14, news appeared about the disappearance of the bank's chairman of the board. 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.
The prices for the bonds of "Peresvet" have collapsed for an obvious reason - the investors have suddenly lost faith. The belief that the bank will pay off its debts.
As I write this, Peresvet bonds are trading at 280 rubles per 1000 par with a yield of approximately 380% per annum:
If the Central Bank revokes the bank's license, the circulation of bonds on the 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 vivid example from the past is the termination of the activities of Transaero, whose bonds are now traded at 20 rubles per 1,000 rubles in face value, that is, two kopecks per ruble:
Compared to Transaero, the bonds of Peresvet are still very expensive.
Market risk
In addition to credit risk, there is also market risk. This is the risk of changes in the situation in the financial market, in particular - the risk of changes in interest rates in the economy.
This risk affects both government and corporate bonds equally. It is associated with rates in the economy: if they fall, then bonds become more expensive, and yields fall. And vice versa.
How market risk is realized
Imagine that on October 31, 2014, we invested in government bonds with a maturity of one year and the then existing yield of 9.5%.
Just a month and a half later, on Black Tuesday, December 16, 2014, the Russian Central Bank, against the background of the collapse of the ruble devaluation, immediately raised the key rate by 6.5 percentage points to 17% per annum.
The key rate, among other things, affects the deposit rates and the profitability of many other financial instruments. Before, roughly speaking, you had deposits at 9% and bonds at 9.5%. And now - deposits at 18% and bonds at 9.5%. Bonds with such yields become dramatically unprofitable.
If we want to sell our bonds now, we need to offer the market some kind of competitive conditions, that is, to catch up with 18% in yield. This can be done either by changing the coupon amount - 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 a bond, that is, 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 the competitive profitability.
As a result: the rate has grown, the competition of financial instruments has intensified. If you sell our bonds now, you will have to lose money.
Another option is to hold bonds until maturity. That is, to wait until the due date 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 maturity may be below 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 a yield will be all the way up to maturity. Compared to the current 9% yield, this is generous.
I looked at the example with government bonds, because historical data on government bond yields are readily available on the Moscow Exchange website. The same thing happened with corporate ones.
Profit after taxes
The effective yield of Tinkoff BO-7 according to the calculations of the exchange was 11.21%. However, unlike government bonds, corporate coupons will have to pay personal income tax (PIT). Taxes will be deducted by the issuer or depositary, and you will receive the coupon already cleared of taxes. And this radically changes the picture.
Excluding personal income tax, the effective yield of Tinkoff BO-7 will be about 9.20% per annum, and the simple yield will be 8.63% per annum. Thus, the personal income tax sharply brings the yield of the corporate issue Tinkoff BO-7 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 with Tinkoff Bank for the same 14 months will be from 6.69 to 8.29% per annum.