Among the debt securities are customary for many modern investors, a bond and an exotic bill of exchange. Both instruments have a similar functionality – the issuer who borrowed funds for a bond or bill, undertakes to redeem the paper after a certain period of time and pay its owner a fee. What are the differences between a bill and a bond, what advantages does each instrument have and what is better to choose in a particular situation?
What is a bill
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The most common bill received in the 90s of XX century. Many companies used promissory notes to raise capital, and then “forgot” to fulfill their obligations. Therefore, a certain negative background has developed around the concept of a “bill of exchange”.
A bill of exchange is simply one of the financial instruments, such as a stock, bond or depositary receipt. In essence, a bill is a debt obligation, according to which the holder undertakes to pay the holder of the bill a specified amount in a specified period of time. In fact, this is a type of debt receipt.
Features of the bill
Distinctive features of the bill:
- issued on an official form, each copy has a number and is registered with the issuer;
- release is made in a single copy;
- on paper only monetary compensation can be paid, but in the event of bankruptcy of the issuer, the right to receive a share in the property of the company arises;
- face value of the bill can be any;
- payment is not made automatically, but only upon presentation to the execution after the specified date;
- The bill cannot be transferred to third parties (exception: a special type of bill that is issued just for this purpose – the buyer of the bill transfers it to its creditor as payment).
Companies that have bought a bill can use it as:
- investment instrument;
- in the security of a loan from a bank or other individual – in this case, the bill will play the role of securing a loan;
- currency in the calculation;
- bank guarantee for carrying out various financial transactions.
The key value of the bill is its face value, i.e. the price that the issuer will pay after the maturity comes. To calculate the nominal value of a bill, you can use the following formula:
where P is the sale price of the bill (i.e. the selling price), t is the maturity period of the bill, S is the rate set as a reward to the holder of the bill.
For example, a bill was sold for 25 thousand rubles. and the interest rate is set at 15% per annum. The validity period of the bill is 182 days. Therefore, when this period expires, the paper will have a nominal value of:
Result: 26,246 rubles – this is exactly the amount the bill holder will receive when the redemption time is right.
Types of bills
There are these types of bills:
- Simple – standard type. The issuer undertakes to pay the investor the amount specified in the bill, after a certain period. In fact, this is a promissory note.
- Interest – this type is as close as possible to a standard bond. It has a nominal value that is redeemed when the bill of exchange expires, as well as an additional interest income that is paid at the time of redemption of the paper. If necessary, the interest bill can be extended for the same period under similar conditions. Income can be determined in advance (for example, 10% per annum) or linked to a specific indicator (for example, the refinancing rate at the maturity date of the bill + premium).
- Discount – this type is initially sold at a price below par, and when it expires, it is redeemed at a nominal price. For example, a bill can be sold for 22 thousand rubles, and redeemed – after 1 year for 23 thousand. As a result, the income on the bill will be 10.45% per annum.
- Transferable – the recipient of funds on the bill is not his buyer, but a third party. The investor can use the bill as security for their own debt.
Most of the bills are non-nominal, i.e. they do not indicate the name of the buyer, but in the transfer of particularly large amounts practiced issuing a nominal bill. On the bill of exchange the data of the debt holder and beneficiary are indicated, i.e. This type of paper is always registered.
Where can I buy and how to sell a bill
In the quality of the drawer can be:
- banking organization;
- legal entity – joint stock company, partnership, LLC, etc.
Usually, the bill is issued to the investor after preliminary negotiations, where the borrower’s real need to raise funds and the amount that the investor can invest in the company at the moment is determined. Issue a bill can any creditors – physical persons or organizations.
Unlike bonds, bills of exchange do not circulate on the organized market, therefore it will not be possible to buy them through intermediaries. The purchase of a bill is possible directly from the issuer.
If we talk about the difference of a bill of exchange from a bond, then the bill is not issued with any specific conditions. The parties agree on the value of the debt paper and the repayment procedure on an individual basis. If a bond is issued in circulation (that is, in one issue certain securities are issued at the same price and under the same repayment conditions), then there is only one bill of exchange.
Of course, the lender may purchase several bills of exchange for a different amount and under different conditions – for the company it may be more profitable than repaying the entire debt at one time. But in any case, the negotiations end with the formation of mutually beneficial conditions.
If bonds are offered to a wide range of investors, then there is already a definite agreement with the acquirers regarding bills. Both qualified investors and entire institutions such as other banks, investment and hedge funds, pension funds, etc. can play their roles.
Despite the fact that the conditions of a bill are negotiated individually, usually the interest rate is higher than on bonds. In addition, the longer the term, the higher the reward of the investor.
What is a bond
Like a bill, a bond is also a debt paper. It is usually issued by legal entities – such bonds are called corporate. If the state acts as an issuer, then such a paper receives the status of a federal loan bond. Regions of the Russian Federation and the city (more precisely, local governments) also have the right to raise funds in this way – the bonds issued by them are called municipal.
Characteristics of a bond as an investment instrument
There are quite a few differences between the bill and the bond. If the bill confirms the existence of a debt and is written out address, the bond is a public loan, it is issued to an unlimited number of persons (some debt securities are placed by subscription, that is, their buyers are announced in advance).
The features of a bond as a debt security are:
- produced in large quantities (circulation);
- the company or the state undertakes to redeem the bond at par within the specified period;
- all characteristics of one issue (face value, coupon, circulation time, offer) are the same;
- the face value of the paper is determined in advance (in the overwhelming case, it is 1000 rubles or 1000 units of currency for Eurobonds);
- The price of a bond is formed during the trading on the stock exchange.
Also an important point: the funds raised during the placement of the bonds are included in the share capital of the company. Consequently, in the event of bankruptcy of the issuer, the bondholders act as creditors of the first stage and may claim compensation in the amount of the nominal value of the security. The exception is subordinated bonds – their holders become lenders of the third stage.
Types of bonds
To classify bonds can be on a variety of grounds. So, by type of income are distinguished:
- coupon bonds – the organization pays remuneration to the holder of the paper in the prescribed amount of par, for example, 7% per year;
- discount bonds – there is no coupon for them, but they are sold in advance at a price below par, for example, for 900 rubles at a par value of 1000 rubles (if the maturity of such a bond is 1 year, then the yield is 11.11% per annum).
Most bonds are coupon codes. Investors buy them for a stable income. Depending on the type of coupon, the bonds differ:
- with a constant rate – a specific coupon amount and payment frequency is determined for the securities;
- variable rate – the issuer can independently change the size of the coupon depending on the economic situation;
- floating rate – the coupon size depends on any external indicators, for example, the refinancing rate or the level of inflation.
Also, there are bonds with depreciation – for such securities, the issuer gradually pays the nominal value. This is used to ensure that the company does not have a large debt at the time of redemption of the issue. Most often, such bonds are issued by municipalities or relatively small companies.
Where is the purchase of bonds
Trade in bonds, in contrast to the sale of bills of exchange, is made on the stock exchange. You can not just come to the issuer and ask him to sell you a bond – so only bills of exchange are sold.
Purchase of bonds in the stock market is made through a broker. The investor will need to open a brokerage account, replenish it with the required amount and only after that you can go to the purchases.
The price of a bond is formed during the bidding process and depends on many factors, mainly on the current refinancing rate. Falling or rising bond prices may be triggered by news or sanctions pressure.
Bills versus bonds
Both types of debt securities — both a bill and a bond — have many of the same characteristics:
- they have a face value and maturity;
- the investor receives income at the redemption of paper or resale;
- Both types of securities can be bought and sold;
- both on the bill and on the bond additional (coupon) income can be received;
- can be issued in any currency;
- inherited in case of the death of the owner.
But at the same time, they differ in fundamental points, and it is most convenient to show the difference between a bill of exchange and a bond in the table.
|Sign of||Bill of exchange||Bond|
|Release form||Paper only||Paper or electronic|
|Release order||Determined in individual order||Is a public offer|
|Is the name of the holder indicated||In some cases, yes||Never|
|Can there be a third party beneficiary||Yes||Not|
|Number of copies||There is only one||Published in large quantities|
|Rating and conditions||Negotiated with investor||Determined by issuer and underwriter during placement|
|Could resold||Not always||Is always|
|Quotation order||Not listed on stock exchange||Listed on the stock exchange|
|Circulation term||Usually up to 1 year||Any|
|Main type of income||Discount (bill is sold at a price below par)||Coupon (a stable coupon yield is assumed for bonds) and a discount|
|Tax||Income is taxed at a rate of 13% in any case.||Not subject to tax OFZ, municipal bonds and corporate bonds issued from 2017 to 2020|
|The procedure for compensation in the event of bankruptcy of the issuer||Debt can be repaid in cash or property||Debt is repaid only in money.|
Between the bill and the bond differences are fundamental. Each type of debt securities is used by investors for their own purposes. So, bills of exchange are usually issued by small companies that attract a limited number of investors, and bonds are issued by large corporations and the state, which need millions of rubles in the form of investments. A bill to sell and purchase is more difficult than a bond. Therefore, bonds are much more accessible for the mass investor and in many ways more functional.