What Are Bonds & What Types Are Available..

What are Bonds?

A financing method utilized by the government and companies to finance big projects. A bond is a unit of debt issued by the government or company, so that in exchange of lending them money you receive a certain predetermined interest for a pre-agreed upon duration. The interest is paid at pre-set intervals and the principal is returned at the maturity date of the loan.

Duration of Bonds:

The duration is based on the type of bond issued

• Short term bonds: less than 5 years.
• Intermediate/Medium term bonds: between 5-10 years.
• Long term bonds: more than 10 years.

Bonds offer a lower risk than investing in the stock exchange because if the company faces any financial difficulties the first thing that must be paid back are bonds and debts. The risk factor depends on the type of bond and interest rate.

Advantages of Bonds for Companies:

• Allows comapnies to finance their projects if they don’t have the budget on hand, without resorting to selling company shares and having new partners. The downside is that they must have the interest for investors available on time.
• The interest rate paid by the company to investors is less than what it would pay if it took out a bank loan.

Advantages of Bonds for Investors:

• Bonds are less risky than investing in the stock exchange. If the company is in a financial crisis it must first pay back the debts and bonds they have. The risk factor depends on the type of bond and interest rate.

Type of Bonds Available on the Egyptian Exchange:

Company Issued Bonds:

1- Fixed interest bonds: the rate of return is fixed, determined by the company and payment is made at a pre-set interval (quarterly, semi-annually, or annually) for a specific duration. 

2- Floating interest bonds: these bonds are limited by certain conditions set by the issuing company and the interest rate changes periodically according to these conditions.

3- Securitized bonds: their purpose is to acquire cash fast. The company pools its financial assets including bank loan installments to guarantee a steady cash flow and pay out any outstanding loans.

Government Issued Bonds:

• Treasury bonds: these are government debts that are issued to finance big projects. They are long term investments as the bond duration is between 2-20 years.

• Housing bonds: issued by the government to finance their housing projects.

• Development bonds: usually issued in USD.

Secured vs. Unsecured Bonds:

Secured bonds are bonds guaranteed by a physical asset. The company uses specific assets as collateral in case it is unable to pay back the investors.

Unsecured bonds are bonds not backed up by any collateral.