8/17/2022 - Economy and Finance

What is a bonus?

By FinGurú

What is a bonus?

This note was written by Frederico Rossi.

One bonus is a debt title, a promise of future payment. The issuer may be a government (National, Provincial or Municipal) or a company and undertakes to return the amount of money requested plus an interest in a given period. They are usually placed on behalf of the bearer and traded on a market or stock exchange. The issue aims to finance investment projects or even to face other debt commitments.

At the time of the issue of a bonus, the amount, the currency, the interest rate to be paid (fija or variable), the form and the payment date of such interest, as well as the conditions and dates in which the capital will be paid. That is why obligations are known asdebt instruments.

What is the nominal value and the public offer?

El Salvador nominal value The obligations may be expressed in weights, in foreign currency or in any authorized account unit, as units adjusted by inflation.

To be able to do public supply, bond emissions must be described in the emission regulator. The obligations may be or may not be reestablished, and the emission period shall be more than one year. If you want to sell the bonus before your expiration, this can be done on the stock market as well as a purchase.

How many parts do you have a bonus?

The obligations have three specific parts:

  • Home: It is the amount indicated in the bonus, i.e. its nominal value, which is usually called in multiples of 100 or 1,000.
  • Coupon:represents the interest rate of the bonus.
  • Deadline: It is the bonus period, these may be a year or up to 100 years.

Example

A government or company may issue a bonus per USD 1,000 M, (Principal), for a 10-year period (Plazo), which will be paid in full to maturity with a 5% annual interest rate to pay semesters (Cupão).

In this way, the issuer will pay the holders of the obligations 5% per year on the USD 1000 M. That is, the nominal value, until the time of its maturity.

After its issue bonds can be purchased and sold in the securities market, therefore, the investor may not keep the bonus until his maturity.

Thus, the bonus in addition to having a nominal value has a market value that may be lower, equal or higher than the nominal value of the bonus.

When this market price of the bonus is below the nominal value is called below the pair, when the values are matched, it is called at par, and when the supera is known as about the pair.

ThisMarket value depends on several factorsthat change throughout the life of the bonus, which has to do with the inherent risks of these types of investment instruments.

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