How does a structure of a security looks like? Typical security (share, bond) is composed of two major parts:
– The casing,
– Coupon sheet with a voucher for the uptake of the new sheet. However, there is a lot of deviations from this rule of construction. When discussing securities we should pay attention to two concepts – essential for the operation of financial markets:
– Liquidity – the ability for quick and profitable exchange for cash. (Securities that are continuously circulating in the market provide high liquidity, because there is always a lot of buyers and sellers. Consequently, it is easy to “liquidate”).
– Transferability – the wide availability of security, easy formula of its purchase and sale, ease of transfer of ownership, and above all, the possibility of transfering the title.
To be a holder of asset you need money. When you buy a security you need to pay attention on the interest rate, denomination, date and terms of repayment and other powers available to the buyer.
A bond is a security containing a debt obligation of the issuer to the owner of this document. A bond is a type of security stating a monetary claim. A bond is a certificate of debt.
In respect of sharing capital by the owner of the bonds who has it purchased, he is due to a steady income – interest (regardless of course whether the debt is repaid – repurchased after bond orbital period).
A bond is a financial instrument of:
– foundation charter (this is an investment for the buyer)
– loan (this is a credit to the issuer).
A bond is an issuer’s debt. Bond for the issuer is a cheaper source of capital than taking out a loan at the bank. The bond has a priority of repayment in the event of liquidation of the issuer. Bond is transferable. It is most commonly issued for a specified period of time. The bond is a financial instrument of medium-and long-term loan. Bonds, like stocks, are divided into registered and bearer. Bond, as already mentioned, is a certificate of the debt. This issuer may pay off this debt once – at the end of the circulation of the bonds or in installments with interest from not repaid part of the debt. A one-time payment may take place at one time for all bonds or may occur in several dates. The designation of specific bonds to repay at different times can occur randomly.
It should be noted that there are bonds, at which the issuer reserves the right to early repurchase all or part of the issue. Bonds having such a clause are known as the callable bonds. Early repurchase procedure is designed to prevent the issuer from excess financial burdens at a time when the nominal interest rate of bonds is much higher than the market interest rate. Reservation of repurchase rights may cost the issuer some money. Callable bonds (redeemable bonds) may have higher nominal interest rate. They are also bonds that have so called “call protection clause”. This is a clause that prevents early redemption (repurchase) by the issuer. Early redemption may mean for the issuer a chance to avoid serious cost, however, this can deprive the bond’s holder his expected revenue. Hence the sense of existence of call protection clause. Sometimes on the market can occur – but currently very rarely – bonds that are not redeemed by the issuer. Holder receives interest constantly. This type of bond is called a perpetual annuity. Considering issues related to the expiry of the bonds (redemption) it is worth mentioning that a certain form of bond’s expiry is the possibility of exchanging it for other bonds or equities.