Bonds are debt securities issued by various entities as companies, sovereign states, public administrations and international organizations to finance themselves.
For an investor, they constitute credit instruments which confer the right to receive, according to the established method, interest and, once the maturity date is reached, the repayment of the nominal capital.
Households and institutional investors are among the main investors. Institutional investors are specialized companies, investment funds, insurance companies and banks, which own the majority of the bonds present on the markets. The term coupons indicates the interest paid by the bonds, usually every three, six or twelve months.
With regard to risks, each type of bond has different characteristics and, on the bond's maturity date, repayment of the capital lent by investors is envisaged. The main risk concerns the impossibility of the debtor to repay, in part or in full, the amount established, thus determining the case of insolvency or default.
The obligations are described in the Italian Civil Code by articles 2410 and following.
FEATURES
Each bond always has some main characteristics:
- A nominal value indicates the capital that is subscribed in the initial phase (on which interest is calculated), and corresponds to the value at which the issuer undertakes to repay the security on maturity, net of interest;
- one coupon represents the periodic interest that the issuer pays to its bondholders. The term derives from the now antiquated custom of detaching a coupon upon payment. Depending on the methods of payment of the coupons, the bonds can be further distinguished:
a) zero coupon bonds, such as BOTs and CTZs;
b) bonds with a fixed coupon (or fixed rate) which pre-establish the amount to be paid for each maturity, such as BTPs;
c) floating-rate bonds indexed to pre-established parameters, such as for example inflation-linked bonds, CCTs, etc.;
- one deadline which indicates the date by which the initial capital is returned to the bondholder. Bonds can be short, medium and long term.
THE ISSUERS
An issuer represents the company or the state that issued the bond, thereby borrowing on the market. The payment of interest and the return of the invested capital depends on the economic solidity of the issuer itself. First of all, different categories of issuer can be distinguished:
- Sovereign states: they offer, at least in theory, the highest level of reliability, higher than any other issue of resident institutions with the exception of emerging countries;
- supranational entities (EIB, WORLD BANK, EBRD, IADB, etc.): these are international banking institutions set up and guaranteed by supranational communities, such as the European Union, in order to raise funds for investments and economic development in specific geographical areas. With a maximum level of reliability, they are the most present and constant issuers on the Euromarket;
- Public bodies and agencies: benefit directly and indirectly from the State guarantee (FFSS, ENEL, ENI, FANNIE MAE etc.) and therefore boast the same level of reliability with due exceptions;
- Banks and financial institutions: possess greater reliability compared to other non-state issuers, being linked to a system of controls by the central bank and other authorities in the sector;
- Corporate issuers: these are companies that operate in different economic sectors and with different degrees of reliability, therefore more exposed to market volatility.
