Many investors resort to investing money in bonds and to receive profit from this procedure in the future. The latter can be in the form of coupons, price differences at the time of repayment, as well as indexing. One of the most profitable is coupon yield on bonds. This is not a new method of earning, which over the years is only being improved.
Coupon bonds
Bonds have been and remain a type of equity securities, the owners of which can receive their nominal value from the issuer plus the percentage profit indicated on them.
Many years ago, in the financial market, bonds were issued in printed form with coupons, each of which was then exchanged for money. What is a coupon? This is a cut-off part of a security of a certain face value and due date. The coupon was cut off or torn off on the day the interest on the bond was paid or paid off by the banking institution. Hence the “coupon bond” - a type of security with interim payments by the issuer that do not affect its face value. Along with coupon bonds, there are zero-coupon bonds, which are also called discount bonds.
The concept of coupon income
Today, the lion's share of securities is no longer issued in paper but in electronic form, which are stored in a vice digital record on the account. However, among financiers, the concept of coupon income on bonds remained. These are no longer cut-off paper parts, but electronic accumulations of cash.
Having an idea of what a coupon and bonds are, it is easy to determine that, in fact, coupon yield on bonds is a small but stable cash flow. This term means income on coupon bonds of various kinds of loans (state, corporate, etc.). According to bankers, this is an analogue of income from a bank deposit (or deposit).
Such income is accrued daily, but paid after a certain period of time: once a quarter, once every six months, or once a year. Funds usually arrive at the investor's account within two to three days from the date of coupon payment.
Coupon rate
The coupon rate (or interest rate) is the annual percentage of income that is calculated relative to the face value of the bond. This is the rate that the bond issuer pays to the bondholder.
For example, if you take the coupon size in the region of 18 percent per annum, and the bond itself costs a thousand Russian rubles, then for the year the security holder will receive a coupon income of 180 rubles.
In the Russian Federation, payment is made twice a year, therefore, from the example described above, it is clear that the owner of the bond will receive two times 90 rubles each. If the paper is sold before the coupon is paid, then the money accumulated during the time of ownership will remain in the account, since the principle of NKD works here.
In addition to the coupon rate, there are other methods of generating income on securities. If a bond with a zero rate is bought, then in this case income is paid in the form of the difference between the cost of the bond issue and the nominal (that is, the redemption price). Such bonds are called discount, as they are issued at a discount in relation to the face value.
What is NKD?
NDC, or accumulated coupon income, is a parameter by which the interest income payment process is performed. In other words, the accumulated coupon income enables securities holders to purchase or sell bonds in the secondary markets until they are repaid without loss.
At its core, the accumulated coupon income is that part of the coupon income on securities, which is calculated by the number of days from a specific date when the issuer last paid the coupon to the current day.
If the owner sells the bond, then the buyer is obliged to pay him NKD accumulated by the day of the transaction. In this way, he compensates the seller for the lost income, since during the sale the coupon is lost.
How to calculate NKD correctly
NKD is always calculated depending on the coupon. For example, if you buy a one-year bond with a coupon of 10 percent for 90 percent of the face value, the investor will receive income to maturity 20 percent per annum. At the end of the year he will be paid plus 10 percent of the exchange rate difference. If the same investor decides to sell bonds for individuals (or legal entities) without waiting for the end of the period, then the NDC will be calculated from the coupon yield of only 10 percent.
So, the accumulated coupon income is always less than the size of the coupon itself. On the day when NKD equals it, the issuer coupon payment occurs, after which a new period starts.
Coupon payment options
Coupon payment options are divided into:
- fixed standing coupon;
- fixed variable coupon;
- floating (or indexed) coupon.
In the first case, the coupon size is agreed upon in advance. From the moment a bond is acquired until the end of its term, its value does not change. Typically, such documents are paid twice a year.
In a variable fixed coupon, the yield is not fully known. In the payment scheme, the issuer assigns interest rates up to a certain period, after which the size of the new coupon is determined.
The situation with the third option is completely different. It all depends on some indicator, due to which the coupon rate is constantly changing. It may vary based on:
- foreign exchange rate;
- inflation rate;
- RUONIA rates
- key rate of the Central Bank.
The difference between deposit and coupon income
Finance professionals often compare deposit income and coupon income on bonds. This comparison is not in favor of the former. After all, its profitability depends directly on the period for which money is invested in the bank. There is no way to withdraw your funds until the period ends. Sometimes there are such offers when the invested money can be taken ahead of schedule without loss of interest, but in this case the interest rate will be much lower than the market.
With bonds, the situation is slightly different. Here you can choose a real return with minimal risk. At the same time, the term of investments in no way affects the size of the interest rate. That is, money in bonds can be held even for one or two weeks and get a normal income.
A bank deposit, on the contrary, will bring profitability several times lower than the market one in a couple of weeks. Thus, the advantage is on the side of bonds, where the main role is played not by the coupon rate, but by the accumulated coupon income. It is he who allows the holder of the security to sell it before the end of the term without losing interest income.
