Treasury bonds (“T-bonds”) are medium and long term financial instruments issued by governments. Clear distinction is currently made between treasury bonds and treasury bills, according to the maturity thereof. Treasury bonds are issued for a term of over 10 years, redeemable in the final installment. Unlike them, treasury bills are issued for a term of less than 10 years, and the government is entitled to redeem them prior to their maturity.
Municipal/institutional bonds are financial instruments issued by various public entities or general institutions for the financing of internal needs. They are more risky than treasury bonds; therefore, they often benefit from tax/charge exemptions in order to be more attractive for investors. The tax exemption only concerns the collected interest and not the capital gain.
Corporate bonds are bonds issued by private companies, and they are the most risky of all bonds. At this time, there are international rating agencies analyzing and classifying issuers according to their risk per several risk classes.
These bonds come in four forms:
- “simple”: not guaranteed by the issuer;
- >“guaranteed”: the issuer guarantees the payment of the coupon and the redemption of the principal;
- “subordinated”: with priority on the issuer’s insolvency;
- “convertible”: allowing their conversion into shares (generally) on a pre-set date.
Most corporate bonds are redeemed prior to their maturity. In some cases, the bond issuance can be doubled by the setting of restrictions by creditors on the financial management of the issuing company (e.g. payment of dividends).
Stocks are widely used by private companies, in order to fund their own needs. The main rights of shareholders are the property right over a part of the issuer’s assets, the right to vote and the right to be paid dividends. The return obtained from such stocks is not certain return, as it varies according to the results obtained by the company for a defined time period. The issuer’s risk is essential in underlying the decision to buy such market bonds or not.