New investors will wonder what a bond is. A bond is a type of security that confirms a debt obligation of a business or government to the holder. In 2024, the appeal of bonds is highly appreciated by investors looking for stable and safe yields in the context of market volatility.
1. What is a bond?
A bond is a type of security that acknowledges a debt obligation from a business or government to the holder. Considered part of the stock market, bonds represent a commitment to pay a fixed or variable interest rate for a certain period of time. Bondholders receive a yield, which is a regular payment of interest, regardless of the business performance of the issuer.
Bonds have priority in the payment process when a company goes bankrupt because they are considered debt securities. Although they do not have the right to participate in the management of the company like shareholders, bondholders still receive preferential treatment in debt payment.
There are many different types of bonds, including corporate bonds and government bonds, as well as different interest rates and characteristics depending on the conditions of issuance. Bonds play an important role in providing capital for organizations and governments, and are also an investment opportunity that attracts the attention of investors.
With the ability to diversify investment portfolios and protect against risks, bonds attract the attention of both individual investors and financial institutions. At the same time, bonds are also an important tool for governments and businesses to provide the necessary capital for development projects and business expansion.
2. Types of bonds
Classification by issuer:
- Government Bonds is a financial instrument issued by the Ministry of Finance to raise capital for the national budget or programs and projects within the scope of state investment. It usually has the lowest interest rate and least risk compared to other types of securities.
- Local government bonds Issued by the People's Committee of a province or city to raise capital for local investment projects and works. The source of repayment is usually from local budget revenue.
- Corporate bonds is a financial instrument that businesses, including financial institutions such as banks, issue to meet capital needs. Usually self-borrowed, self-repaid and self-responsible for the ability to repay.
Classification by bond nature:
- Convertible bonds is a type of bond that only makes sense when issued by businesses. The characteristic of this type of bond is that it can be converted into shares at a point in the future, at a fixed rate. Although it usually has a low interest rate, it attracts investors because of its attractive conversion rate, providing opportunities for growth and profit potential from holding shares after conversion.
- Non-convertible bondsA debenture, on the other hand, is not convertible into shares in the future. Instead, it represents a commitment by the issuer to pay a fixed or variable interest rate to investors for a specified period of time.
Classification by bond yield:
- Fixed Rate Bonds is a type of bond that has a defined yield (%) along with interest payments throughout the bond term recorded in the bond transaction contract.
- Floating Rate Bonds is a type of bond with a fixed yield, plus a variable yield based on a reference interest rate. Usually, domestic enterprises use the reference interest rate as the average 12-month term interest rate of state-owned banks such as Vietcombank, Vietinbank, BIDV and Agribank.
- Zero Coupon Bonds is a type of bond where the bondholder does not receive interest, but instead is purchased at a price below face value and is repaid at face value when the bond matures.
Classification by method of guarantee:
Secured bonds A type of bond in which the issuing organization uses assets such as real estate, machinery and equipment, or stocks to secure the issuance. Usually, the collateral has a market value greater than the face value of the issued bond. In case the issuing organization cannot pay, the bondholder has the right to sell the collateral to recover the outstanding amount.
Unsecured bonds, on the other hand, do not have any assets pledged to guarantee payment. Therefore, they have a higher level of risk than secured bonds.
3. What are the characteristics of bonds?
Bonds are also a type of security. To distinguish bonds from other types of securities, we can rely on some of the following characteristics:
- Bond price is an important concept in the financial market, and there are many different types of prices. The face value of a bond, also known as the nominal value, is the amount written on the bond and is considered the principal. This is the basis for determining the amount that the bond issuer must pay the bondholder when the bond matures. In Vietnam, the face value of domestically issued bonds is usually set at 100,000 VND and multiples of 100,000 VND. For bonds issued in foreign markets, the face value will be determined according to the regulations of that country. The issue price is the initial selling price of the bond and is determined as a ratio of % of the face value. This price can be less than the face value, equal to the face value, or greater than the face value depending on market conditions and the requirements of the issuer.
- Bond term is the period of time from the date of issue to the maturity date, which is the date on which the issuer must repay both principal and interest to the bondholder. Bonds are classified based on their maturity: Short-term bonds: have a maturity of 1 to 5 years; intermediate-term bonds: have a maturity of 5 to 12 years; long-term bonds: have a maturity of 12 to 30 years. However, some issuers may divide the principal and interest payments into several installments, called coupon periods. The coupon period is the time during which the issuer pays interest to the bondholder according to the interest rate agreed upon when the bond was purchased. The coupon period can be set on an annual or biennial basis.
- Bond yield is the interest, the profit that the owner receives when investing in bonds. Because bonds are debt securities, bondholders will be repaid the interest before it is distributed to shareholders, regardless of the issuer's business performance.
4. Distinguish between stocks and bonds
Bonds and stocks are both securities, with similarities and differences. Investors need to clearly distinguish between these two products to make the most appropriate investment choice.
| Securities Type | Bonds | Share | |
| Similarities | – Both are securities confirming ownership of a portion of assets invested in a company or organization. – Can be transferred, mortgaged, or pledged – Both are financial management tools for investors. | ||
| Other points | Nature | Is a debt security | Is equity securities |
| Term | Limited time | No deadline specified | |
| Right of conversion | Convertible into shares | Cannot be converted | |
| Publisher | Government, businesses, banks and financial institutions | Only JSC is allowed to issue shares | |
| Get yield | The profit is fixed, regardless of the company's business performance. | Income depends on the company's business performance. | |
| Owner's rights | – Is a creditor of the issuer – No right to participate in the company's business activities – No need to share risks and company debts. – In case of dissolution or bankruptcy, bondholders are given priority for payment before shareholders. | – Is a shareholder of the company – Have the right to participate in deciding important issues of the company – Must share risks with the company in proportion to capital contribution – In case of dissolution or bankruptcy, the order of payment is after the creditors. | |
5. Should I invest in bonds?
Whether or not to invest in bonds depends on each investor's personal financial situation, investment goals, and risk threshold. Here are some points to consider:
Benefits of investing in bonds:
- Income stability: Bonds typically offer a fixed return, providing a steady source of income for investors.
- Diversification: Investing in bonds can diversify your investment portfolio, helping to reduce overall risk.
- Risk protection: Bonds are generally considered to have a lower level of risk than stocks in volatile market conditions.
- Payment priority: In the event of bankruptcy of a bond-issuing company, bondholders are usually paid before shareholders.
Limitations of bond investment:
- Low Return: The yield from bonds is typically lower than that of higher-risk investments like stocks or real estate.
- Interest Rate Risk: Bond yields are affected by fluctuations in market interest rates.
- Unimaginable risks: In some cases, unimaginable risks may occur whose causes are unrelated to the business performance of the bond-issuing enterprise.
When deciding to invest in bonds, investors should consider carefully and consult a financial professional to ensure that their decision reflects their specific investment goals and aspirations.
6. How to invest in bonds?
Information on how to invest in bonds and how to open a securities account is very useful for beginners interested in investing. The choice of method of opening an account and buying bonds depends on the personal preferences and personal convenience of each investor.
However, before investing, it is important to have a clear understanding of the types of bonds, the risks and benefits of each. For beginners, it is extremely important to consult an expert or seek information from reliable sources.
Also, remember to always keep in mind risk management and your investment goals. Investing in bonds can be part of diversifying your portfolio, but you also need to carefully consider and weigh them carefully before making a decision.
Source: Onstocks
