Financial securities : the bonds

Assiari beautiful nation! Kutshi great nation! Great and wonderful are GOD's plans for you. You are not a default choice. You were chosen from the beginning. GOD knows the end from the beginning. He is not surprised by any event. We discern the times. He discerns the hearts. He orchestrates circumstances and creates times (Daniel 2:21). When the devil tells you that you will not succeed, tell him that GOD knew he would betray Him. Tell him that JESUS knew he would fail. Tell him that history has already proven that GOD always, yes always, has the last word. When he talks to you about your past, tell him that your present and your future are in CHRIST. But his end is known from the beginning and for eternity. GOD does not invest to lose. He will not lose you, and he will not lose what he has invested in you. He will not lose you, and he will not lose what he has invested in you. You are blessed with a blessing that cannot be stolen. Oh praise GOD your FATHER! Oh cheer the LORD your big brother! Oh honor your guardian the HOLY SPIRIT! 🙂 Upon your life, I call the oil of joy! With your most beautiful smile, dance like David!

“Cut the grass in the fields and, while the new grass grows, gather hay on the mountains. Have sheep to make clothes for yourself, and goats to buy a field. Use the milk your goats give in abundance to feed yourself, your family, and your servants.” (Proverbs 27:25-27, Fluent french translation)

To finance their activities, companies can choose between increasing their capital, merging with other companies, borrowing from financial institutions, borrowing from partners, and issuing bonds. A bond is a security representing a portion of a debt. A company or a government wants to borrow money. We lend them money by buying bonds. In return, the issuer will pay the bondholders (us) coupons each year, representing interest, and will repay the principal when the bond matures. Bonds can be issued by a country, a community or a company.

The life or maturity of a bond can range from a few months to an infinite period (perpetual bond). The longer the maturity, the greater the risk of non-repayment and the higher the interest rate. In the case of perpetual bonds, the issuer may reserve the right to redeem the bond at a predetermined price.

The different types of bonds:

• Government bonds or Treasury bills (short term) or Treasury bonds (long term) : issued by a government or a community (city, region, department).

• Corporate bonds : issued by a private company;

• Convertible bonds : issued by a private company, can be converted into shares in that company.

• Fixed-rate bonds : interest (coupon) is at a constant rate and the frequency of payments is predefined.

  • Example of a bond with a face value of €1,000 and an annual interest rate of 2%. The coupon paid each year will be €20 (1,000*2%).

    
    

• Zero-coupon bonds : no interest payments. Coupons are capitalized and paid in a lump sum at maturity.

• Floating rate notes : The interest rate varies from year to year and sometimes from month to month. The coupon amount is not known in advance. These bonds are indexed to the money market, bond rates, inflation rates, or a stock market index.

• Revisable coupon bonds : the coupon may change from fixed to variable or vice versa during the life of the bond.

During their lifetime, bonds are listed on the stock exchange. Holders can resell them before maturity or buy others during their lifetime. Investors can subscribe to bonds when they are issued (the primary market) or buy them later on the stock exchange (the secondary market). On the secondary market, the buyer of the bonds pays the seller the accrued coupons. This is the portion of interest calculated on a pro rata basis for the number of days between the date of the last payment and the day before the sale.

Rating agencies are responsible for assessing the ability of debt issuers to meet their commitments. The most stable issuers (in terms of economy, social factors, forecasts, etc.) are perceived as the safest. They receive very good ratings from rating agencies. This allows them to pay low coupons (interest). Conversely, the lower an issuer's rating, the higher the coupons they are forced to pay, due to the high risk taken by investors. Ratings range from AAA to D (default).

The riskier a bond is, the lower its price (selling price) will be. Bonds are listed (on the stock exchange) as a percentage of their face value, at par (without accrued interest).

Example

• A bond trading at 90% of its face value of €1,000 is priced at €900. If the coupon is fixed at 4%, the holder will receive a coupon of €40 (1,000 * 4%) each year until maturity. For every €900 invested, the holder will receive €40 each year.

• Let's assume that the issuer's rating improves and it is now trading at 95%. The interest rate remains fixed at 4%. For every €995 invested, the holder will still receive €40 each year until maturity. However, they will be able to sell the bond before maturity for €995. They will make a gain of €5.

Risks

• Interest rate increases : these systematically lead to a decline in the value of bonds. It is therefore not advisable to sell bonds when interest rates are rising.

• Inflation : if inflation exceeds the yield on fixed-rate bonds, bondholders will not make a profit. Inflation is the loss of purchasing power of money, resulting in a general and sustained increase in prices. The same amount of money or salary no longer buys as much as it did the previous year.

• Insolvency or bankruptcy of the issuer : if the issuer is unable to pay interest and repay the principal, the holder loses everything. The same applies to shareholders.

• A decline in the bond market as a whole : bonds lose value. Holders may be forced to sell at a loss.

** Assiari = Good morning in ngumba (Cameroon)

** Kutshi = Good morning in Tshokwe (DRC Congo)