Bonuses

We explain what bonuses are, what they are for and the types of bonuses that exist. Also, what is bond issuance and some examples.

Bonuses
Bonds are a type of promissory note that can be sold to third parties.

What are bonuses?

In the financial area, a type of debt instrument is called bonds. employed by both private and government entities and which are more or less equivalent to debt securities, or more simply put, they are a kind of promissory notes that can be sold to third parties.

The bonuses exist to obtain funds from the financial market. They are issued by some financial entity and placed in the name of the bearer in the market or stock exchange, where they are traded. The issuer of the bonds receives an amount of capital and agrees to return it at the end of a predetermined period, paying interest to the holder in a fixed or variable income.

This means that every bonus also presents a percentage of associated risk: risk that market interest rates vary and alter the price of the debt security; risk that the issuer will be unable to return the borrowed capital at the end of the term; or risk that at the maturity of the bond, inflation has devalued the purchasing power of the currency so much that the return is imperceptible (there are no profits).

Those familiar with the area speak of maturity of a bond to refer to the time remaining until maturity and for the capital to be repaid.

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Types of bonds

Simple bonuses
Simple bonds allow the holder to contribute capital to a company.

There are the following types of bonuses, according to the game rules that determine them:

  • Simple bonuses Those that allow the holder to contribute capital to a company and acquire part of its debt, receiving interest and collecting the capital invested at maturity.
  • Public bonds Those issued by a State institution to finance itself.
  • Exchangeable bonuses They can be exchanged for already existing shares in the company or organization, instead of capital.
  • Convertible bonds They can be exchanged for newly issued shares, at a pre-set price, although yielding a lower return.
  • Zero coupon bonds It does not pay any interest during its maturity, but rather pays everything at the end when it matures, accumulated. Its value is usually lower than the nominal value.
  • Cash bonuses Issued by companies to meet treasury needs, upon maturity they return the invested capital to the buyer.
  • Bonuses strips. Its name comes from English Strip (“divide”), allow the value of the bond to be separated in each of the payments it generates, allowing interest money and capital money to be negotiated separately.
  • Perpetual debt bonds They never mature, that is, they never return the invested capital, but instead perpetually generate interest.
  • Junk bonds High-risk, low-rated securities that reward risk with high returns.

Bond issue

The issuance of bonds can be carried out by a private financial organization (companies, banks, etc.) or public (central banks, public companies, etc.), and is usually of interest to capital holders who wish to preserve their assets against the inflation, or simply put them to produce income.

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This is largely because the bonds present a presumed flow of money you can know the value they will present at the end of the term. However, bonds do not escape the dynamics of the stock market, and their operating rules are always defined in the contract signed between issuer and holder.

Examples of bonuses

Bonuses
The income bonds had a face value of US$5.00.

A couple of examples of bond financing are:

  • Income bonds In 2011, the North American city of Chicago issued bonds under the title “City of Chicago – Chicago Midway Airport – Revenue Bonds – Series 2001A”, for a total amount of US$222,465.00. These bonds had a face value of US$5.00 and a face value of 5.5% with a maturity period of 30 years. With the money raised in this way, the new terminals at Midway Airport were built, and the profits from the airport made it possible to pay the interest on the debt incurred.
  • General Obligation Bonds Monterrey County, belonging to the state of California, USA, issued in 2002 a series of bonds under the title Carmel Unified School District – Monterey County—California – General Obligation Bonds – Series 2002. A total of US $9,663,455.00 with a nominal value of US$5,000 and a nominal interest of 6%, payable over 30 years. With this money, the county's schools were developed and renovated, given that its profits were high and they could pay the interest on the bond without problem.

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