Chapter 8. Types of Securities: Debt Securities

In this chapter we continue to consider types of securities. We will consider debt securities – these are securities that give their owner the right to receive a fixed interest rate (income) and to repay the loaned amount by a certain date. In Russia, debt securities are:

 

treasury obligations of the state;
savings certificates;
bills of exchange;
bonds.

Let us consider each type of debt securities separately. State treasury obligation is a type of securities placed by the state. Buying a treasury bond, the owner contributes money to the state budget, in exchange for which he receives a fixed income during the entire period of ownership of treasury bonds, and at the end of the term receives the invested amount back.

Savings certificates are written certificates issued by a credit institution for the deposit of funds. Their depositor is entitled to receive the deposit and interest on it, but only when the certificate’s holding period comes to an end. Certificates can be bearer or registered.

Bills of exchange – a written debt obligation filled in according to a strict form established by the stock exchange. It gives the owner (bill holder) the exclusive right to demand from the promissor (debtor) the payment of the sum of money specified on the bill upon expiration of the term of this obligation.

Bonds – a type of debt securities, which is an obligation of the issuer (the company that issued the bonds) to return to the creditor (the owner of this security) the face value of its bonds as soon as the fixed term expires. Also, the issuer’s obligation is to periodically pay interest to the creditor.

Issuing bonds is a way for the issuer to get a loan for a long period of time and on favorable terms, without resorting to a bank. The holder receives a higher interest than on a bank deposit, which is called coupon (or coupon). Bonds can be issued by banks, the state and its subjects, as well as private companies and enterprises.

By buying a bond, the holder does not become the owner or co-owner of the company. But this way of investing is very reliable, and here is why. The fact is that payments on bonds are made even in case of bankruptcy of the issuing company. In this case, payments on bonds are made in the first place, and payments on shares are made afterwards. In addition, bonds can be presented for early redemption, if such a situation was envisaged at placement of bonds. Competent purchase of bonds involves studying the credit history of the issuer, the financial position of the company both at present and in the future, as well as interest payment schedules on previous bonds. Bonds can be:

interest-bearing and non-interest-bearing;
registered and bearer;
freely circulating and with a limited circulation term.

Interest income from bonds can be received by paying coupons or redeeming (repurchasing) the bonds. Therefore, an investor has two ways to buy bonds and receive income:

buy bonds at a discount (discount) to face value, redeeming them at the end of the term at their face value;
buy bonds at face value and receive regular coupon income (interest on the face value) during the entire term of the bond.

Since investing in bonds is subject to minimal risks, the purchase of bonds is used for long-term capital accumulation or preservation. Now we know the main types of securities, their features and differences. It should be said that it is stocks and bonds that have the greatest appeal and are currently the most widespread. But there are even more attractive financial instruments in which these securities act as the underlying asset. They will be discussed in the next chapter.