Debt instruments, known as bonds, are securities through which an investor lends money to the issuer (the entity issuing the bond) for a specified period of time in exchange for a fixed income, called a coupon. At the maturity of the bond, the investor receives back the nominal value of the bonds they have purchased.

Types of Bonds

Government Bonds - These represent debt instruments issued by a government as a means to borrow money. Holders of government securities receive interest payments on fixed dates, based on a predetermined coupon rate, and nominal repayment at the nominal value on the maturity date of the bond:

• Government securities offer a consistent income through fixed interest payments for the entire period of holding the investment, a fixed date for nominal payment, and provide a certain level of capital protection combined with predictable returns;
• Government securities are guaranteed by the state, making them considered investments with very low risk. Therefore, these instruments yield lower returns compared to other debt instruments;
• Depending on the investment horizon, one can invest in instruments with different yields. Conditionally, government securities are divided into three groups - short-term (maturity up to 1 year), medium-term (maturity between 1 and 5 years), and long-term (maturity over 5 years);
• Government securities are issued in various currencies.

Corporate Bonds - These represent debt instruments issued by companies. Companies issue bonds to finance their projects.

In Bulgaria, a large portion of corporate bonds are traded on the Bulgarian Stock Exchange, but there are also those traded over-the-counter. These type of bonds offer relatively higher coupon rates, leading to higher yields, at the expense of increased risk due to the nature of the issuers and the quality of the collateral.

Advantages and Risks of Investing in Bonds

• Bonds are low-risk financial instruments because they offer guarantees to preserve invested capital by repaying the nominal on the maturity date and to realize profit through payment of the fixed interest (coupon).
• Another advantage provided by bonds is that in the event of bankruptcy, bondholders will be compensated before shareholders. However, if the company performs well, the bondholder will not receive a portion of the company's income (unlike shareholders), distributed as dividends or new shares - they are paid only the pre-determined nominal and interest.
• The most common risk with bonds is associated with potential delays in interest or nominal payments. It is important whether the issuer of the bond is financially reliable to fulfill the instrument's conditions. It is assumed that government securities (GS) are the lowest-risk financial instruments since they are issued by the state, and the risk of default is minimal.
• With corporate bonds, the risk for the investor is higher. It depends on the company's operations, financial condition, credit rating of the company issuing the bonds, and the collateral of the bond issuance. The yields from corporate bonds are usually higher.

How to trade bonds with ELANA Trading

With ELANA Trading, you can purchase bonds in two ways - over-the-counter or through our platform Elana Global Trader.

• For purchasing bonds through over-the-counter trading - you can contact our brokers at tel. 02/ 81 000 26 or 02/81 000 25, brokers@elana.net
• For exchange trading with bonds - you can use our platform Elana Global Trader, where you can buy them yourself or with the assistance of our broker. If you have any questions, you can contact us at tel. 02/ 81 000 95.

Key concepts related to bonds

• The Nominal Value is the amount that the holder will receive upon the maturity of the bond. Newly issued bonds are sold at their nominal value. The face value of the bond is not its price. The price of the bond varies throughout its term due to multiple factors. When a bond is traded at a price higher than its nominal value, it is said to be trading at a premium. When a bond is sold at a price lower than its nominal value, it is said to be trading at a discount.
• Coupon (Interest Rate) is the amount that the bondholder will receive as interest. Most bonds pay interest every six months, but it can be paid monthly, quarterly, or annually. The coupon represents a percentage of the nominal value.
• Maturity is the date on which the investor will receive the nominal amount of the bond. The maturity can range from one day to decades. A bond with a maturity after 1 year is much easier to predict and is thus less risky than a bond with a maturity of 20 years. The longer the period to maturity, the higher the interest rate. The price of a bond with a longer maturity will fluctuate more than the price of a bond with a shorter maturity.
• The Issuer of the bond is the entity that issues the bond. Whether investors will get their "loan" back largely depends on the issuer's assessment of its stability. Government bonds are considered lower risk than corporate bonds because the government will always have income and the ability to repay its debt, unlike a company that may incur losses. Therefore, corporate bonds usually offer a higher yield to attract investors