A bond is a debt security issued by companies, national governments, and public sector entities to borrow on the bond market. Through bond issuance, these participants borrow money and raise financial resources to expand or develop their activities. In exchange for its debt, the issuer pays the bondholder (investor) periodic interest (coupon), which is calculated according to the security’s nominal value. 

In other words, the bond market helps issuers raise funds, while investors earn income through their investments. 

How does the market operate?

Bonds are especially suitable for those who prefer to receive stable and periodic income compared to high-risk investments.

The bond market is characterized by:

• Low risk,
• Periodic and predictable returns,
• Short, medium, and long-term maturities.

A bond can be transferred to other persons, meaning by selling the bond, ownership rights can be transferred to someone else, which distinguishes bonds from bank deposits. Another important difference is that investing in bonds can generate potential income in two ways:

1. Income paid over its life in the form of coupon

Some bonds pay coupons periodically, predetermined by the issuer.

For example, for the purchase of a bond with a value of 100,000 AMD, with a 5-year maturity, and a fixed interest rate of 9%, the investor will receive 9,000 AMD as a coupon each year.

2. Income at maturity: the increased value of the bond

When the bond matures, the investor recovers their initial capital and the last coupon. If the bond was purchased below its nominal value, the investor gains profit at maturity from the difference between the nominal value and the market price. This profit complements the coupon income received.

Throughout the life of a fixed-rate bond, interest rate changes affect its price. In fact, bond prices and interest rates trend in opposite directions. Lower interest rates result in an increase in the price of the bond; if the investor sells their bond at that time, they make a profit. Higher interest rates result in a decrease in the price of the bond; if the investor sells their bond at that time, they make a loss.

Types of bonds

Bonds are classified by maturity into short-term, medium-term, and long-term.

By issuers, bonds are classified as government and corporate. Government bonds are issued by the state and local authorities, while corporate bonds are issued by companies and organizations.

By income type, bonds are coupon bonds and zero-coupon bonds. Coupon bonds pay periodic coupons, while zero-coupon bonds pay the entire coupon at maturity.

Bonds also differ by interest rate and coupon calculation method:

• Fixed interest rate bonds

These are the most common bonds, where coupon payments are known in advance and do not change during the bond's life.

• Floating interest rate bonds

The interest rate on these bonds changes depending on refinancing or benchmark interest rates.

• Inflation-indexed bonds

The interest rate on these bonds is linked to inflation, so the coupon value changes according to inflation. This income protects against inflation risks.

There are also convertible bonds, which can be converted into other securities of the issuer. The conversion terms are set in the issuance conditions.