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Federal loan bonds as a viable alternative to deposits

Bonds
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Federal loan bonds — an interesting financial instrument, which few people know: not wanting to delve into the principles of financial markets, far from a large economy, people often settle for the usual Bank Deposit of any type.

Meanwhile, the yield on OFZ is usually much higher than on deposits. Judge for yourself: during the recent crisis, the current yield on Federal loan bonds stood at 6-10%.

What is BFL?

In “Financial and credit encyclopedic dictionary” edited by A. G. Gryaznova (Moscow: finances and statistics, 2002), offers a definition:

OFZ — state nominal coupon securities with a maturity of more than 1 year and entitling the holder to receive interest income attributable to the nominal value of the bonds and the principal amount (par value or other property equivalent), paid at maturity OFZs.

Simply put, Federal loan bonds — securities that the Ministry of Finance releases with the purpose of replenishment of the budget.

Buying them, you directly credit the state and make a profit.

Although we use the word “paper” in the material, these bonds do not exist — are taken into account through the recording of custody accounts in the Depository (a Depository participant of the securities market, which takes into account the transfer of rights to them as transactions).

Issue OFZ is series.

Each issue is supported by a global certificate, which exists in two copies — one stays in the Ministry, the second goes to the storage to Depositary.

The certificate contains all the important information about the schema definition of the coupon income on the date of its payment, about date of repayment of bonds, etc.

All editions serves the Bank of Russia. Through its territorial divisions, as well as through the credit organisations, carried out financial settlement of transactions.

OFZ can buy and brokers, banks and individuals. Individuals are comfortable working with bonds or through brokers (it’s cheaper, but you will need to monitor the situation on the financial markets), or through a management company.

It is not necessary to think that this method of investing is fun only for the very wealthy. The value of most of these bonds on the market — about 1 thousand virtually any. However, to start, of course, is with the amount of more solid — at least a few tens of thousands.

Tool benefits

V. Koryakovtsev in the e-book “Federal loan obligations” lists the following advantages OFZ:

  • guaranteed coupon income;
  • the lack of taxation of income coupon (approx. the author of the article is the personal income tax is levied only on the increase in the market value exceeding the face value of securities and accrued interest);
  • the accumulated coupon income the owner receives when selling OFZ bonds till the next coupon payment;
  • a sufficiently high liquidity;
  • availability — the minimum number of acquisition OZF — 1 lot value of 1 000 roubles;
  • increase the market value.

There is another important advantage of Federal bonds before you Deposit: if you prematurely close the Deposit, you probably will lose interest; if bonds are to be sold, you will be given not only of their market value, but the amount of accumulated income.

What are the risks?

Of course, BFL has some minuses.

First, not all mentally prepared to work with them (especially when you consider the fact that the bonds are book-entry they can not touch it and take it home).

To open a Bank Deposit is easier to understand the basics of stock trading.

Secondly, the original price of the bond can change — then in its early sales you may receive less than invested. On the other hand:

  • loss partly kompensiruet coupon yield
  • price doesn’t have to be, often it is significantly higher, which allows the owner of OFZ earn on the course.

At maturity of Federal bonds to obtain their full value at par.

To lose all the money invested in OFZ, really, but in really extreme circumstances. This refers to the default situation, when the state is unable to meet its debt obligations. The last time this happened in 1998.

You have to understand that the default — the collapse of the economy, the result of the destruction of the financial system as a whole. If it does happen, is unlikely to spare and money saved in other ways — worthless cash, and Bank deposits will disappear or will be frozen indefinitely.

The choice of bonds

As we mentioned above, each OFZ implies separately designed conditions.

Attention should be paid to this parameter as the maturity. Initially, it’s best to choose bonds that will have to repay in six months or a year. So you will not be for nothing, if BFL would have to sell at the fall market.

You must understand the difference between bonds with a constant and variable coupon.

The first approach, if you expect to receive income from price fluctuations, a key feature of the second is the relatively high coupon and the less pronounced sensitivity to changes in interest rates.

Under any circumstances it is advisable to purchase OFZ from multiple releases at once, with different maturity dates.

I’m afraid to miscalculate, tracking the price — just hold the bonds until expiration. You will receive a profit at the expense of coupons (payments, usually twice a year) and will return the original investment.

If you are interested in bonds, you will probably be curious to read about the other low-risk instrument of accumulation — cumulative life insurance.

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