What Are Investment Bonds

Bonds in the stock market have one distinctive feature – a fixed return. This means the investor knows in advance how much the issuing company will pay.

However, there are bonds where the interest rate is not predetermined. Let’s take a closer look at what investment bonds are.

Contents

• What are investment bonds
• How their income is determined
• Types of investment bonds
  • Participation bonds
  • Investment bonds with an accumulation corridor
  • Bonds with a memory effect
• Advantages of investment bonds

What are investment bonds

Like regular bonds, investment bonds have a maturity date set by the issuer, at which point the company returns the bond’s face value to the investor. However, the coupon interest rate depends on the performance of underlying assets, which can be any financial instruments such as stocks, commodities, raw materials, and more.

How their income is determined

The profit from investment bonds consists of two parts:

• a fixed income, usually set at a minimum level;
• income that depends on the changes in the value of the underlying assets.

Types of investment bonds

Investment bonds are divided into three main types, differing by how the underlying assets affect their yield.

Participation bonds

In these bonds, the investor’s income directly depends on their share in the price change of the underlying asset. A participation coefficient is set, which can be greater or less than 1. Typically, income from these bonds is paid at maturity.

For example, a participation investment bond linked to the growth of the Moscow Exchange index with a participation coefficient of 1.2. If the index rises by maturity, the investor’s profit is calculated as:

yield = index growth × participation coefficient

So, if the index grows by 10%, the bond’s yield will be 10% × 1.2 = 12%.

Participation investment bonds are an optimal choice for investors expecting asset growth but who want to avoid risking their principal.

Investment bonds with an accumulation corridor

For these bonds, a price range is set for the underlying asset. The investor earns income for each day the asset’s price remains within this corridor.

For instance, consider an investment bond with gold as the underlying asset, offering 9% annual yield and a corridor of ±150 dollars from the gold price at issuance. If the gold price was $2000 per ounce at issuance, the investor receives income at 9% per year for every day the price stays between $1850 and $2150.

These bonds suit investors uncertain about whether the asset price will rise or fall.

Bonds with a memory effect

The investor receives income if a “payment condition” is met—typically when the underlying asset’s price exceeds a certain threshold. Usually, these bonds are based on a basket of assets, and the payment condition is determined by the worst-performing asset in the basket.

These bonds have a unique feature called the memory effect. If the payment condition is not met, the income is not lost but can be carried over to future payment dates, provided the condition is met then.

For example, an investment bond based on a basket of four stocks pays 4.5% every six months if the drawdown on each stock does not exceed 8%. If at a payment date any stock’s price has dropped more than 8%, the payment is skipped but “remembered.” When the condition is met on a later date, all missed coupons are paid out.

Such bonds are suitable for investors seeking regular income.

Advantages of investment bonds

• No risk of principal loss – the issuer is obligated to repay the bond’s face value at maturity;
• Potentially higher returns – usually exceeding deposit rates, inflation, and yields on traditional bonds;
• High liquidity – investment bonds can be sold anytime on the secondary market;
• Investment bonds are available for purchase through individual investment accounts.

Investment bonds are an excellent tool for investors seeking good returns without risking their capital.