We explain what bonuses are, what they are for and the types of bonuses that exist. Also, what is bond issuance and some examples.
What are bonuses?
In the financial area, a type of debt instruments is called bonds employed by both private and government entities, and that are more or less equivalent to debt securities, or more easily, they are a kind of promissory notes salable to third parties.
The bonds exist to obtain funds from the financial market. They are issued by a financial entity and placed in the name of the bearer in the market or stock exchange, where they are traded. The issuer of the bonds receives an amount of capital and agrees to return it at the end of a predetermined term, paying interest to the holder in a fixed or variable income.
This means that all bonus also presents a percentage of associated risk: risk that market interest rates vary and alter the price of the debt security; risk that the issuer will be unable at the end of the term to repay the borrowed capital; or risk that when the bond matures, inflation has devalued the purchasing power of the currency so much that the return is imperceptible (there are no gains).
Connoisseurs of the area speak of maturity of a bond to refer to the time remaining for its maturity and for the principal to be repaid.
Types of bonds
There are the following types of bonuses, according to the rules of the game that determine them:
- Simple bonds. Those that allow the holder to contribute capital in a company and acquire part of its debt, receiving interest and collecting the invested capital at maturity.
- Public bonds. Those issued by a State institution to finance itself.
- Exchangeable vouchers. They can be exchanged for existing shares in the company or organization, instead of capital.
- Convertible bonds. They can be exchanged for newly issued shares, at a fixed price, although yielding a lower return.
- Zero coupon bonds. It does not pay any interest during its maturity, but it pays it all at the end when it matures, accumulated. Its value is usually less than nominal.
- Cash bonds. Issued by companies to pay cash needs, upon expiration, the invested capital is returned to the buyer.
- Bonds strips. Its name comes from English Strip (“Divide”), they allow to separate the value of the bond in each one of the payments it generates, allowing the interest money and the principal money to be negotiated separately.
- Perpetual debt bonds. They never expire, that is, they never return the invested capital, but they perpetually generate interest.
- Junk bonds. High-risk, low-rated securities that reward risk with high returns.
Bond issue
The issuance of bonds can be carried out by a private financial organization (companies, banks, etc.) or public (central banks, public companies, etc.), and it is usually in the interest of holders of capital who wish to preserve their assets against the inflation, or simply put them to produce income.
This is largely due to the fact that bonuses present a presumed flow of money, you can know the value that they will present at the end of the term. However, bonds do not escape the dynamics of the stock market, and their operating rules are always defined in the contract signed between issuer and holder.
Bonus examples
A couple of examples of bond financing are:
- Rental bonds. The North American city of Chicago issued bonds in 2011 under the title “City of Chicago – Chicago Midway Airport – Revenue Bonds – Series 2001A”, for a total amount of US $ 222,465.00. These bonds had a face value of US $ 5.00 and a nominal interest of 5.5% with a maturity of 30 years. With the money raised in this way, the new terminals at Midway Airport were built, and the profits from the airport made it possible to pay the interest on the debt incurred.
- General obligation bonds. The county of Monterrey, belonging to the state of California, USA, in 2002 issued a series of bonds under the title Carmel Unified School District – Monterey County — California – General Obligation Bonds – Series 2002. With them a total of US $ $ 9,663,455.00 with a nominal value of US $ 5,000 and a nominal interest of 6%, payable over a 30-year term. With this money, the county’s group of schools was developed and renovated, since the profits from it were high and they could pay the interest on the bond without problem.