What is forex for dummies. Forex for dummies - what is it and how to make money on it? Real market trading
When we talk about investing in the stock market, we usually mean buying stocks. More and more often, even from non-professionals, you can hear about them. Bonds are, of course, inferior in popularity to equities. Nevertheless, as soon as the stock markets experience a fall, investors actively resort to the reliability and stability of bonds.
What are bonds
If you have borrowed money from friends or took out a bank loan at least once, then it will not be difficult to figure out what bonds are.
Money is needed not only by people, but also by organizations and the government. Money is needed for business development or for the implementation of any social programs... For example, the construction of subways, roads, hospitals, power plants. The difficulties for corporations and governments are that conventional banks are unable to provide them with such amounts.
The solution to these problems was the issue of bonds. The necessary funds are collected by the sale of bonds.
Bond is actually a loan. An investor, purchasing bonds, provides his funds for use by the company that issued them. For this, the company pays interest on these funds for a certain period, after which it returns the entire borrowed amount.
Ownership of a bond does not give ownership of the company. The owner of the bonds does not receive dividends, he does not vote at the meetings of shareholders.
All this gives an answer to the question of what bonds are - these are debt securities.
Bonds and Eurobonds
In other words, a bond is a bond promissory note companies to investors.
In the international market valuable papers Eurobonds (Eurobonds) are in circulation. Usually Eurobonds are issued in dollars, sometimes in euros. In a word, these are bonds in foreign currency... For the first time, Eurobonds were issued in Italy. This happened in 1963. Hence the prefix "euro" originated.
Government debt securities are called government bonds. Another name is Treasury bonds. By their validity period, they are divided into long-term (for 10-30 years), medium-term (from 1 to 10 years), treasury bills (up to a year). Many investors are attracted by the fact that there is no tax on income from government bonds.
There are two types of Eurobonds: Eurobonds and Euronotes.
Eurobonds are bearer documents and do not need collateral.
Euronotes, on the other hand, are registered documents that require security from the issuer.
Characteristics of bonds
Bonds are fixed income securities.
What is a bond is also explained by the characteristics that are spelled out in the certificate.
1. Term of circulation. Shows when the investor will receive their money back.
2. The nominal value of the bond is indicated - the amount to be returned after the agreed period.
3. Coupon - interest set for payment.
For example, an investor purchases a bond with a face value of one thousand dollars with a ten percent coupon for ten years.
This means that such a bond will bring in one hundred dollars annually for ten years. At the end of this time, the company will return one thousand dollars to the investor.
Government bonds and their types
Government bonds (treasury bonds) are issued by the government to finance social projects. The government acts as a guarantor of money back, so Treasury bonds are the most reliable of bonds. Government bond income is not subject to major taxes.
Types of bonds:
- Long-term treasury bonds.
They have a circulation period of ten to thirty years. Bonds of various states are nominated from one to ten million dollars. Interest is usually capitalized every six months or once a year. - Medium-term Treasury bonds.
Their circulation period is from one to ten years. Nominated in amounts up to five thousand dollars. - Treasury bills (zero coupon bonds)
Terms of circulation from one month to a year. There are no coupons for them. Investors buy Treasury bills below par. When bonds are redeemed, their par value is paid.
Perpetual bonds
Our securities market received the new kind bonds - perpetual bonds.
The agreed coupon yield is paid on them. But the maturity date is not stipulated. Although most often issuers still prescribe a long term - from ten years.
This type of bonds has long been known in the world securities market. In 1753, the Bank of England issued perpetual Eurobonds. They are still in circulation and investors are still receiving their coupons.
In Russia, the first to issue perpetual bonds - all of these bonds are Eurobonds - VTB Bank and Gazprombank, then Alfa-Bank and Russian Standard Bank. The bank's Eurobonds are backed by forty-nine percent of the shares.
Perpetual bonds in rubles were created in 2016 by Rosselkhozbank. He offered a coupon of 14.25%. It will be possible to forcibly redeem the bonds in ten years.
Terms of new offers investment product very different. For example, Russian Standard Eurobonds have a 13% coupon. But the payment is stipulated by the condition of profit in two quarters in a row.
Benefits of perpetual bonds
The advantage of these bonds for investors is a higher coupon yield than for term bonds of the same denomination. In addition, if there is a secondary securities market in the country, the investor has the opportunity to sell perpetual bonds at any time for their actual value. At the same time, he does not lose the accumulated income from coupons.
What is the advantage of release perpetual bonds for a bank?
According to international and Russian standards of banking supervision, funds raised with the help of such bonds are equal to the main (authorized) capital. This, in turn, enables the bank to qualify for the benefits of additional credit loans.
Investment risks
Like any investment, the purchase of Eurobonds and bonds is associated with certain risks.
Although it is considered the safest investment.
- credit risk. Possibility of bankruptcy of the issuer;
- the risk of rate cuts. Eurobonds can change their terms if the lending rules in the country change;
- liquidity risk. It is difficult to predict the securities market. If the volume of the issue is low, the liquidity of Eurobonds is lower;
- currency risk. When the exchange rate falls, income decreases.
All of these risks are not considered high. When choosing a reliable issuer, with a careful analysis of all significant parties, the purchase of Eurobonds will bring a good income.
It all depends on the investor's strategy. Income from government bonds is less, but the risks are minimal. To save funds in economic crisis they are the most reliable tool.
Buying bonds
Government bonds can be bought from government agencies that sell securities. Sberbank can provide full information... Some banks also provide this service to their clients.
Eurobonds can be purchased from issuing banks. All this is the primary market.
Bonds and Eurobonds can also be purchased at secondary market - through a broker. Brokerage commissions are additional costs.
Most of the bond transactions are done through brokers. It is possible that there simply will not be funds to open a special deposit account that brokers will need.
In this case, you can turn to investment funds that deal with bonds.
Working with government agencies to purchase bonds will save you unnecessary expenses.
A perpetuity annuity is an endless annuity that never ends, or a cash flow that always continues. There are few perpetual bonds that actually exist, for example in the UK the government has issued them in the past; they are famous and are still traded as British consoles. Other types of similar investments are real estate and preference shares, and the same techniques can be used to set the price of perpetual bonds. A perpetual bond is a form of regular annuities (or annuities).
Perpetual bonds refer to fixed income securities. To calculate the current market value bonds discount and sum up the cash flows generated by the coupon yield.
A perpetual bond is an annuity in which periodic payments begin on a fixed date and continue indefinitely. It is sometimes called perpetual annuity. Fixed coupon payments for long (forever) invested sums of money are prime examples of perpetual bonds.
The value of a perpetual bond is finite because payments that are expected far in the future have an extremely low present value (present value of future revenue streams). Unlike a regular bond, perpetual bonds never redeem and there is no present value for them. par value... Assuming payments start at the end current period, the price of the perpetual bond is simply the sum of the coupon payments discounted at the appropriate discount rate or yield.
Real life examples (similar to perpetual bond pricing):
An agreement often used in real estate finance for valuing real estate at the capitalization rate. Using the capitalization rate, the value real estate can be defined as a relation net income or the flow of net cash from property (eg rentals) to the capitalization rate. Basically, using the capitalization rate when accounting for the value of a property assumes that the current income from the property continues indefinitely. This estimate is based on the assumption that rents will rise at the same rate as inflation. Although the property may be sold in the future (or even the very near future), it is anticipated that other investors will apply the same approach to property valuation.
Another example is the model for assessing common shares corporations - a permanent method of discounting dividend growth, which assumes that the market price of a share equals the discounted flow of all future dividends, which is assumed to be infinite. If the discount rate for stocks with a certain level of systematic risk is 9.50%, then the value of a stock (analogous to a perpetual bond), with one dollar of dividend income, is $ 10.53 dollars. However, if future dividends increase by 3.00% every year, then the constant method of discounting the growth of dividends, in fact, subtracts 3.00% from the discount rate of 9.50%, which gives 6.50%, which means that the price of a share (analogue of a perpetual bond) with one dollar of income is $ 15.38.
Perpetual bond pricing formula:
B0 - current bond price;
r is the required rate of return.
Formula for pricing a perpetual bond with multiple intra-annual interest accruals:
B0 is the current price of the bond;
C - annual coupon yield, rubles;
r is the required rate of return,% per annum;
z - number of charges per year.
An example of the valuation of a perpetual bond. The yield on the bond is UAH 120, the nominal yield is 14% (annual coupon yield), the maturity is indefinite. Estimate the value of the bond.
Current price bonds:
Bo \u003d 120 * 100/14 \u003d UAH 857.14.
Bonds with a longer maturity are more risky in terms of change market value of a bond.
Perpetual bonds are purchased to increase the duration of their investments.
AND I. Lukasiewicz
According to domestic legislation, the maturity of debt obligations issued in the country cannot exceed 30 years. Thus, there are currently no legal grounds for the existence of bonds with a longer maturity period in Russia.
At the same time, perpetuity bonds are not particularly exotic in developed countries. Both governments and large corporations act as their issuers.
British consoles, issued in the early 19th century, and French annuities are examples of government perpetual bonds. However, it should be noted that currently the market for perpetual obligations is represented mainly by 100-year bonds of the largest corporations.
In 1996, IBM became the 21st company to issue 100-year bonds on total amount USD 850 million. The bond coupon rate is 7.22%. That's 80 percentage points higher than the yield on the government's 30-year Treasuries. The number of issuers of 100-year bonds includes such world-famous corporations as Walt Disney, Coca-Cola and others.
As a rule, the holders of such bonds are various funds and insurance companies, thereby increasing the duration of their investment portfolios and receiving funds to finance their own long-term projects. Consider the methods for evaluating perpetual bonds.
Perpetual bond yield
Since the circulation period of such bonds is very long, for the convenience of the analysis, an assumption is made that the periodic income they bring is infinite. At the same time, the payment of the face value (redemption of the bond) is not expected in the foreseeable future, and coupon payments are considered the only source of income received.
Since bond coupon yields are constant and their number is very large, such a flow of payments is called perpetuity annuity.
Let's determine the current yield Y of the perpetual bond. It is equal to:
, (2.20)where k - annual rate coupon; N - face value; P is the price; K - market value (price).
To determine the yield to maturity YTM of a perpetual bond, the following ratio can be used:
, (2.21)
where m is the number of coupon payments per year.
It is easy to see that if coupon payments are made once a year, the yield to maturity is equal to the current one, i.e. for m \u003d 1, YTM \u003d Y. Consider the following example.
Example 2.14
The IBM 100-year bond was purchased at 92.50. The coupon rate is 7.72%, payable semi-annually. Determine the profitability of the operation.
Y \u003d 100 (0.772 / 92.50) "0.0834, or about 8.3%.
YTM \u003d (1 + (0.772 / 2) (100 / 92.50)) 2 - 1 ”0.0852, or about 8.5%.
As follows from the results obtained, both the current and the yield to maturity of this bond are higher than the coupon.
Valuation of perpetual bonds
The present value of a perpetual bond can be determined by assuming that the flow of payments it generates is a perpetual annuity. Let's write a formula for determining the current PV value of a similar annuity:
. (2.22)
Multiply both sides of (2.22) by (1 + r):
. (2.23)
Let us subtract expression (2.22) from (2.23):
.
Since 1 / (1 + r) ¥ ® 0, PV´ r \u003d CF. Where from:
. (2.24)If payments are made m times a year, the formula for calculating the present value of the perpetual annuity will take next view:
. (2.25)
Let's determine the present value of 100 units of the bond from example 2.14, based on the required rate of return of 8.5%.
Thus, with YTM \u003d 8.5%, the price paid for the bond in example 2.14 was slightly lower than its present value.
The considered valuation methods can also be used to analyze preferred or common shares, if a constant dividend is paid on them. Since stocks do not have the deadline circulation, their owners have the right to receive dividends as long as the issuing enterprise is functioning. In the case of regular standing payments on the stock generated by it cash flow can be conditionally considered an eternal rent, for the analysis of which relations (2.20 - 2.25) can be used.
The use of the EXCEL RFP in the analysis of perpetual bonds provides greater accuracy and flexibility of calculations. At the same time, there are no special functions for dealing with indefinite or equivalent obligations in the EXCEL RFP.
To automate the execution of the corresponding calculations, a template that implements the analysis of coupon bonds, or the template we developed in the first chapter for the analysis of annuities, can be used.
As an exercise, try to develop on your own a special template for analyzing perpetual bonds by implementing the ratios (2.20 - 2.25) by means of the EXCEL RFP.
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Book - Forex for Dummies. Briefly about its authors
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