A bond is a financial obligation that responds to a promise of payment in the future.
Bonds are debt securities that can be issued by the State (national, provincial, municipal governments, etc.), private companies (industrial, commercial or services) or supranational institutions ( development corporations, regional banks). These tools can have fixed or variable income and allow the issuer to obtain funds directly from the market .
In other words, it is a financial obligation that responds to a promise to pay that will be made in the future and for which a document is presented on paper where the amount is recorded, the amount of time available. the debtor to be able to repay the loan and how the repayment will be (deadlines, type of payment, etc.)
Typically, the bond is a bearer security that can be traded on a stock exchange. The bond, experts say, represents a commitment made by the issuer to guarantee the return of the original capital with the addition of the corresponding interest (which usually forms what is known as a coupon ). In the case of variable interest rates, they are most frequently updated based on some kind of index taken as a reference (as occurs, for example, with the Euribor).
Types of bonds
It is interesting to mention that there are various types of bonds, among which are convertible bonds (which can be exchanged for newly issued shares at a value already set in advance), exchangeable bonds (possible of being exchanged for already existing shares), zero coupon bonds (they only pay interest when they are amortized), cash bonds (issued by companies and repayable at the set maturity), perpetual debt bonds (they do not contemplate the return of the principal capital, but rather propose the payment of interest indefinite) and junk bonds (they offer a high yield since they are considered high-risk securities).
A voucher can also be a card, issued by a company or by the State, which can be exchanged for essential items or used as a discount on a purchase. For example: “The list price of the mattress was 200 pesos, but since I have a 10% discount voucher, I ended up paying 180 pesos.”
Bonds are a common investment.
Important aspects of the contract
There are many cases of people who, on the recommendation of their financial advisors , have invested their money buying bonds. Why do they do it? Because it is believed that it is the best way to preserve capital , a way to save without paying more than what is stipulated in the contract; This is because the bonds have a presumed flow of money and the value it will have until the end of the term can be known. This type of investment is very common in people who want to save for their children's future , to buy a house or even increase the value of their pensions.
When signing a bond , however, it is advisable to carefully read the conditions that are inscribed in the document that identifies it. Among the things that should be studied carefully are:
- Maturity : Indicates the date on which the debt must be paid, generally responds to a range that can go from one to thirty years, but always depends on the type of bond in question;
- The contract : Since there is an indeterminate amount of various bonds, there are also contracts; They specify the obligation of each party and the payment conditions, among other important details of the transaction;
- Interest : They can be fixed or variable and based on this the period of time you have to pay them also depends;
- Tax rates : Depending on the type of bond, these rates may vary; In some cases the interest is tax-free and in others it is not.
Depending on the objectives you have when assuming this debt, one or the other will be more appropriate and it is highly recommended to have an investment specialist to go to in case of doubts, who can advise us correctly on the steps to follow.