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Bond Coupon - Beginner's Review

Bonds occupy an important place in the world of finance and diversification of risks. Almost every major investor accounts for more than half of this particular type of securities. Let us consider in detail such concepts as "coupon income", "accumulated coupon income". We give the calculation formulas.

Introduction: what are bonds

Bond (from the English. "bonds") is a debt security by which you can get a pre-negotiated guaranteed income during its ownership.

In simple words, bonds resemble bank deposits. They also accrue a predetermined interest income. You can know in advance how much investment will bring for a certain period (six months, a year, 3 years, etc.).

What is a bond coupon?
Coupon - This is a reward for investors who gave the issuer a loan of money. In other words, profit.

The following types of coupons

  1. Constant. The easiest option. When placing a certain value is set for the entire duration of the security. Thus, the buyer can know in advance the exact profit after any period (even after 5 or more years, if the expiration is large)
  2. Variable. The coupon depends on the current market situation (most often attached to the RUONIA rate for the last 6 months)
  3. Indexable. A small coupon is charged on it, but its face value increases by the size of inflation. In the US, such bonds are popular. In Russia, they are not so popular.
  4. Zero (discount). The bond is issued cheaper than face value. Investor income will be as it grows to the nominal price.


Read more about bonds in the articles:

  • Bonds - what is it
  • Government bonds (OFZ)
  • Eurobonds - what is it and how to buy
  • How to buy bonds

What is coupon yield on bonds in simple words

Coupon yield on bonds - This is the established amount of payment that its holders receive, depending on the period of its retention. Sometimes also called "coupon interest rate"

For example, coupon yield may be 8%. This means that for 1 year the investor will receive 8% per annum as payment. During this time, the price of a bond may fall or rise - this is another matter. But he will get his 8% in any case.

What is accrued coupon income (NDC)

Accumulated coupon income - This is the profit on the bond that has accumulated since the previous coupon payment.

Let's consider NKD as an example of OFZ. For government bonds, payments are made 2 times a year (once every 6 months).

For example, now is June 10, 2019. The last payment on the OFZ 29011 coupon was on January 31, 2019. With the current coupon yield of 8.24%, the VAT would be:

(8.24% × 130) / 365 = 0.02934% (in rubles it is 29.34 rubles)

130 is the number of days that have passed since the last payment on January 31.

Now let's look at how the accumulated coupon income is taken into account when buying or selling a bond.

How to calculate VAT

An investor who wishes to purchase a bond pays two components: its current value and NKD. The accumulated coupon income is paid to the previous owner of the security.

At the time of coupon payment, NKD is reset.

For example, if 4 months are left before the next coupon payment, then we must pay the previous owner of the NKD bond in the amount of 2 months. Let's say coupon income is 8% per annum. So we will pay:

NCD = 8% × 2/12 = 1.333% (or 13.33 rubles per 1 piece)

If we want to sell the bond before the coupon is paid (earlier than after 4 months), then the new owner will pay us NKD. If we do not do anything, then after 4 months we will receive 4% of the issuer.

We can say that every day a bond becomes more expensive by the amount of coupon income per 1 day (coupon income × 1/365). In order not to offend anyone in terms of income, such a scheme was invented.

This is a very fair scheme, which allows each investor to receive accumulated income depending on the number of days in which the bonds were in his hands.

How is the payment of VAT to the previous owner

Your broker does this automatically. The same is true for selling bonds. Your task is only to remember that each bond, in addition to its market price, also has NDC.

The accumulated coupon income is automatically included in the value of securities.



NKD = Denomination × (C / 100) × Day / 365

Where:

  • C - current coupon rate (in percent per annum)
  • Day - the number of days from the start of the coupon period to the current date
  • 365 - calculation base in a normal year (366 in a leap year)

NKD gives the advantage that we can sell bonds at any time without losing income. If we draw an analogy with a bank deposit, this allows you to quickly and efficiently transfer money from one asset to another. Most deposits do not provide for early closure without loss of accumulated interest.

You can also buy or sell only part of the bonds. NDC is calculated for each individual bond.

How to know NKD

  • Self-calculate according to the above formula
  • In the QUIK trading terminal
  • View on rusbonds or bonds.finam.ru sites
((Denomination - Purchase Price + Coupons for the period of ownership) / Purchase Price) × (365 / Number of days to maturity) × 100%

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