What is a bond and how to invest in bonds

If you’re looking for an income instrument beyond a bank deposit, corporate bonds are one of the most common options. Azerbaijan’s securities market is relatively young, but bonds are increasingly used by both private and corporate investors. Here we explain what a bond is, where the income comes from and what to know before investing.

What a bond is

A bond is a debt security. The company that issues it — the issuer — raises money from investors and promises to repay the bond’s nominal value at the end of its term and to pay agreed interest in the meantime.

Put simply, buying a bond means lending money to a company in return for interest.

Key terms

• Nominal — the value stated on the bond, repaid when the circulation period ends. For example, in Finex Kredit’s 2023 issue each bond had a nominal value of AZN 500.
• Coupon — the periodic interest payment, expressed as an annual rate.
• Coupon frequency — how often interest is paid: monthly, quarterly or annually.
• Circulation period — the time from issue to redemption.
• ACI (accrued coupon income) — interest built up since the last coupon payment but not yet paid.
• Listing — admission of the bond to an exchange’s official list, showing that the issuer meets disclosure and reporting requirements.

How income is calculated

Coupon income = amount invested × annual coupon rate.

Example: AZN 10,000 invested in a bond with a 17.7% annual coupon, paid monthly.

• annual coupon income: 10,000 × 17.7% = AZN 1,770;
• monthly coupon income: 1,770 / 12 = AZN 147.50.

These figures are before tax. The bond calculator on our website shows monthly, annual and full-term income for your amount, term and yield.

What ACI is and why it matters

Say you buy a bond between two coupon dates. The seller has “earned” the interest from the last coupon up to today but hasn’t received it yet. That amount is the ACI, and it is usually added to the purchase price. In return, you receive the full coupon at the next payment date.

A simplified example: a bond with a AZN 500 nominal and a 17.7% annual coupon pays about AZN 7.38 a month. Halfway through the month, the ACI is about AZN 3.69. Finex Kredit’s daily quotation table shows the nominal and the ACI separately.

The exchange and listing

Since 24 December 2015 Finex Kredit’s securities have been listed in the standard segment of the Baku Stock Exchange, making it one of the first three issuers admitted to that segment. The company’s official external auditor is RSM, and audit reports are published in the “Reports” section.

Before you invest

1. 1Research the issuer: track record, audit reports, capital.
2. 2Read the terms: nominal, coupon rate, payment frequency, circulation period, currency.
3. 3Compare yields with deposits and other bonds.
4. 4Assess the risks: a bond is not an insured deposit, and income depends on the issuer’s ability to pay.
5. 5Diversify: don’t put all your money into one instrument.

Benefits and risks

Benefits:

• interest income known in advance;
• steady cash flow with a monthly coupon;
• disclosure requirements for listed bonds.

Risks:

• the risk that the issuer fails to meet its obligations;
• liquidity, if you need to sell before maturity;
• currency risk on US-dollar bonds.

How to buy Finex bonds

Bonds vs bank deposits

There are a few key differences. A deposit is held at a bank and, in cases set by law, may be insured. A bond is a security, and its income depends on the issuer’s financial health. In return, corporate bonds often pay more than deposit rates. Bond interest is usually paid periodically, so the investor gets a steady cash flow over the term.

Who bonds suit

• people with spare money for a set period who want monthly income;
• private investors looking to diversify;
• companies placing temporarily free funds.

Frequently asked questions

Can I sell a bond before maturity? That depends on the issue’s terms and market demand — ask a specialist about the specific issue.

In what currency is income on dollar bonds paid? Usually in the bond’s currency; the terms are set out in the issue documents.

Finex bonds are available in manat and US dollars to both individuals and companies. Fill in the “Bond order” form on our website and an investment specialist will contact you within 24 hours with details of current issues and terms.