Definition of commercial bonds

A bond is a type of security that confirms that the issuer owes the buyer a certain amount of money. By selling bonds, the issuer takes a loan from the buyer, committing itself to repay it within a fixed period of time or to offer other forms of benefits. All liabilities are precisely described in the content of the bonds. The most important conditions are the redemption date determining the date of repayment of the loan by the issuer, the nominal value of the bond determining the value of the return, as well as information about interest or lack thereof.

During online training , we say that corporate bonds are debt securities issued by companies that allow you to raise capital for the development of the company. In exchange for the invested funds, investors receive interest on a certain date. Comparing them with Treasury bonds, you can mainly see the difference in higher interest rates, they are also associated with a higher risk. These include credit risk, when the issuer has problems paying interest or returning the principal amount, exchange rate risk related to a decline in the price of bonds on the secondary market, as well as liquidity risk, when there are not enough buyers on the secondary market.

Commercial bonds can be purchased m.in. on the Warsaw Stock Exchange, in brokerage houses, on the primary market or through investment funds. The benefits of investing in them include higher rates of return, access to various market sectors, which allows you to diversify your portfolio, as well as the possibility of reselling on the secondary market.

Features and types of bonds

There are several types of commercial bonds on the market, which differ, m.in in the method of interest, duration or collateral. The most popular are bonds with a fixed interest rate, the amount of which is at the same level throughout the life of the investment, and with a variable interest rate, which depends on the change in the value of market indicators, e.g. interest rates. There are also indexed bonds, in the case of which the interest rate depends on the change in the value of the indices, including inflation, as well as bonds secured by the issuer by allocating specific assets in the event of insolvency.

One of the characteristics of commercial bonds is the nominal value, i.e. the amount that the issuer undertakes to return to the bondholder on the maturity date. It is also the basis for calculating interest. The coupon, or interest rate, determines the amount of interest that the issuer will pay to bondholders. It is possible to pay interest on a regular basis, and the coupon itself may change. The maturity date is the date after which the issuer undertakes to return the nominal value of the bond to the holder.

There are short-term (up to 3 years), medium-term (from 3 to 10 years) and long-term (over 10 years). A credit rating assesses the credit risk of the issuer, and it is a matter on the side of the credit rating agencies that informs investors about the issuer's ability to pay interest and the nominal value of the bonds on time. Credit risk means the risk of the issuer not being able to repay interest or the nominal value of the bond. Bonds can be listed on the stock exchange or on the over-the-counter (OTC) market.

Their feature is also liquidity, i.e. the ease with which bonds can be bought or sold on the market. It is worth mentioning safeguard clauses understood as special conditions included in a bond issue agreement to protect the interests of investors. These include, m.in, restrictions on incurring additional debt, selling assets or paying dividends by the issuer. On Webinar Universe , we also mention that some of the bonds have redemption options that allow the issuer to redeem the bonds early or give the bondholder the right to request early redemption.

Selection and purchase

When choosing corporate bonds, you should pay attention to several most important factors, such as the assessment of the issuer's creditworthiness. It is also worth checking the credit rating of the issuer, which shows the likelihood of default, and also make sure to understand the form of interest that is offered. You should choose bonds with an appropriate duration, taking into account your needs and investment plans, as well as those with collateral from the issuer's assets. Another selection criterion is the terms of sale on the secondary market, as it is worth checking whether the bonds are listed on the stock exchange or other secondary market, which will facilitate their resale if necessary.

Treasury or commercial bonds?

Treasury bonds are issued by governments, which is why they are considered a safer investment, as the risk of default is extremely low. They differ from corporate bonds in m.in interest rate, as it is higher for commercial bonds to compensate investors for the higher risk associated with the possibility of the issuer's default. Treasury bonds are also characterized by higher liquidity, which is related to greater demand for them on financial markets, and they are also a more frequently used investment instrument.

Further differences occur in the field of credit rating. The highest credit ratings of credit rating agencies generally concern government bonds, and corporate ratings have different ratings, depending on the financial condition of the issuer. Additionally, government bonds are tightly controlled by governments, and central banks and financial institutions often use them as part of their reserves. Commercial ones, on the other hand, are subject to market regulations, but do not have the same level of guarantees. Regardless of the choice, each type of bond should be part of a diversified investment portfolio.

Commercial bonds are an attractive form of investment for those looking for stable income. When deciding to invest in commercial bonds, it is also worth checking out the Webinar Universe where we discuss this topic. Such an analysis will allow for a more conscious and strategic approach to investing in the financial market.