Bonds for Investors: How to Earn with Minimal Risks

What are Bonds

A bond is a debt security, essentially an acknowledgment of debt: a company, government, or bank borrows money from an investor and agrees to repay it with interest within a set period. The issuer of the bond (the one who issued it) pays the nominal value of the security at maturity and periodically pays coupons—fixed interest from the nominal amount.

For example, a bond with a nominal value of 1,000 ₽ and an 8% coupon brings the investor 80 ₽ per year. At the end of the bond's term, the investor receives back 1,000 ₽. Such payments make bonds a tool with predictable returns.

Bonds are considered relatively safe compared to stocks. Government bonds (for instance, OFZ) carry virtually no default risk since they are guaranteed by the state. These securities usually provide lower yields, but they protect investments. Bonds are typically issued for a specific term (ranging from a few months to several decades). The maturity date of a bond is the date when the issuer is obligated to return the nominal amount to the owner.

On this page

Read: ~8 min

In this article, you will learn the basic concepts of bonds and get answers to key questions about investing in them. We will explain the types of bonds available in the Russian market (government OFZ, municipal, corporate, mortgage, subordinated, and other structured bonds) and what to look for when choosing a specific issue. Additionally, we will clarify the role of the bond issuer and the main risks (market price fluctuations, liquidity, issuer default) associated with investing in bonds.

• What are bonds? A simple explanation of the essence of debt securities for the investor.

• What types of bonds are there? Classification: government (OFZ and municipal), corporate, mortgage, subordinated bonds.

• What to look for when choosing bonds. Key parameters: yield, coupon, term, credit rating of the issuer, and availability of collateral.

• What are mortgage bonds? Bonds secured by mortgage loans, their reliability and profitability.

• What are subordinated bonds? Bank bonds with additional risks and higher yields.

• Who is the issuer of a bond? Major issuers in the market (government, banks, companies) and why they issue bonds.

• What risks are associated with bonds? What is default? Changes in bond prices, risk of issuer non-fulfillment (default).

• What is a technical default? The difference between a temporary delay in coupon payments and an actual non-payment.

• Try for free. Opportunities for free analytics and education on bonds.

• Other articles on this topic that may interest you: useful materials for investors.

What Types of Bonds are There?

In the Russian market, several main types of bonds can be distinguished:

• Government bonds (OFZ). Issued by the Ministry of Finance. They carry virtually no default risk, as they are guaranteed by the state. Usually have low yields. There are also regional and municipal bonds issued by local authorities in the Russian Federation.

• Corporate bonds. Issued by private companies and banks. The risk of these bonds is higher than that of government bonds, but they typically offer greater yields. Some companies issue bonds in foreign markets (currency bonds).

• Mortgage bonds. Secured by mortgage loans and issued by specialized mortgage agents. Such bonds are considered reliable (the collateral is real estate) and often have yields higher than OFZ.

• Subordinated bonds. Mainly issued by banks. In the event of non-payment, senior debts are serviced first, so they carry higher risks. In exchange, investors receive a higher coupon (usually 1–3% more).

What to Look for When Choosing Bonds?

When analyzing a specific bond issue, several important parameters must be considered. First and foremost is yield. There is current yield, which indicates the percentage you will receive in a year from the invested amount, and there is yield to maturity—the annual income if you hold the bond to the date of nominal return. It is also worth looking at the size of the coupon (fixed percentage in rubles) and the frequency of payments (every 91, 182 days, or annually), as well as the nominal value—the amount the investor will receive upon maturity.

Another important factor is the term to maturity: longer terms usually provide higher yields but increase the risk of price changes. The maturity date can be found in the characteristics of the issue. When selling a bond before its maturity, the accrued coupon is taken into account: the buyer will pay the previous holder a portion of the interest proportionate to the time since the last payment.

It is also important to assess the reliability of the issuer: the entity to which you are lending money. This can be done by looking at the credit rating and financial indicators of the issuer. If the company or bank has a low rating or no payment history, the investment will be riskier. The presence of collateral or guarantees also reduces investor risks. If all parameters are satisfactory, the investor can purchase the bond through a broker and begin receiving regular coupon payments.

What are Mortgage Bonds?

Mortgage bonds are a type of debt security backed by mortgage loans. Essentially, they are a structured instrument: the debt is secured by real estate collateral. The bank issues mortgage loans to individuals and sells these loans to a mortgage agent (for example, AIZHK/DOM.RF). The agent pools these loans together and issues bonds based on them.

Holders of mortgage bonds receive regular coupon income from mortgage payments. For example, if a bank issues a mortgage at 8% per annum, and the agent issues bonds with a 7% coupon, the difference is retained by the agent. For the investor, high yields (usually higher than OFZ) come with minimal risks: the collateral in the form of housing protects investments. Typically, the issuance of mortgage bonds lasts for 10 years or more, allowing investors to expect stable long-term income.

• Issuance scheme: mortgage loans are issued by the bank and sold to the mortgage agent; the agent pools the loans and issues bonds; investors purchase the bonds and receive coupons. Mortgage bonds are close in reliability to government bonds but may yield higher returns.

Try for Free

Many brokers and financial portals offer free access to analytics and educational materials on bonds. For example, mobile applications from major brokers have sections with information about bond issues—current quotes, data on coupon yields, credit ratings of issuers, and market news—accessible to any user for free.

• Free analytics: In the applications and on broker websites, there are sections with analytics on bonds—price charts, current yield indicators on coupons, and news about issuers. This information is openly available to everyone and helps investors assess issues before purchasing.

• Educational materials: Educational platforms from brokers and banks host webinars, seminars, and publish articles on bonds. They explain how to calculate yields and understand the basic concepts (coupons, terms, issuer ratings).

What are Subordinated Bonds?

Subordinated bonds are a special type of bond that are mainly issued by banks in Russia. They have a lower priority of payment: senior debts are serviced first, and subordinated bondholders receive payments only after that. The law allows the issuer to write off the nominal value of these bonds or defer coupon payments, which entails increased risk.

• Risks: The issuer may write off the nominal value or temporarily suspend payments on such bonds. Due to the long issuance term (at least 5 years) and low market activity, it is difficult to sell these securities quickly (low liquidity).

• Yield: Investors receive a higher coupon—usually 1–3% more than standard bonds from the same bank. Access to such issues is often restricted to qualified investors due to the increased risk. Before purchasing, it is essential to carefully examine the credit rating of the bank and its financial condition.

Who is the Issuer of a Bond?

The issuer of a bond is the entity that issues the bond and attracts borrowed capital. For example, the government is the issuer of OFZ and other government bonds, while banks and companies are the issuers of corporate bonds. The primary objective of the issuer is to raise funds from investors as debt and repay them with interest after a certain period.

This mechanism can be illustrated by an example: A retail chain needs 20 billion ₽ for expansion. The company could take a loan from a bank, but it can also issue 20 million bonds with a nominal value of 1,000 ₽, a term of 5 years, and a coupon of 10%. Many investors will likely buy these bonds, as such a rate is more profitable than a deposit. Consequently, the company (issuer) obtains the necessary funds, while investors receive regular coupons and the nominal amount back by the agreed deadline.

An issuer can be not only a corporation or the government but also regional authorities or banks. Meanwhile, the reliability of the issue is largely determined by the reputation and credit rating of the issuer. For instance, OFZs are issued by the Russian government, which guarantees payments on them: this makes government bonds the most reliable. The higher the issuer's rating, the lower the risk of default, although such securities generally offer lower yields.

What Risks are Associated with Bonds? What is Default?

Bonds are considered one of the safest instruments, but they still carry certain risks.

• Market risk. The price of a bond on the exchange constantly fluctuates due to overall interest rate movements. If rates rise, bond prices fall. However, if the bond is held to maturity, the investor will still receive the full nominal amount, even if the market price has decreased.

• Default risk. This is the situation when the issuer cannot pay the coupon or the nominal amount. Defaults do not usually happen suddenly; investors learn about financial troubles in advance, and the bonds decrease in value. If default is declared, investors may lose their entire investment.

• Liquidity risk. If there are few buyers and sellers for a bond, it may not be possible to sell it at a favorable price.

• Inflation risk. If the yield on a bond is lower than the inflation rate, the investor's real return declines—the rise in prices reduces the purchasing power of the coupon payments.

A default on a bond is the bankruptcy of the issuer: a situation in which it stops paying coupons to investors or returning the nominal amount.

What is Technical Default?

Technical default is a temporary delay in payment on a bond, but not a complete refusal to pay. If the issuer fails to make a coupon or nominal payment on time, they are usually given a short grace period (typically up to 10 days) to resolve the issue. At this stage, the issuer has effectively breached the payment deadlines but may still be able to settle the debts and avoid a full default.

However, if the debt remains unpaid after the grace period (usually up to 30 days), the technical default transitions into a full (actual) default: creditors acquire the right to demand immediate repayment of the debt and initiate bankruptcy proceedings against the issuer. During a technical default, the prices of bonds can significantly drop as the market anticipates the outcome. If the issuer manages to settle the debt within the grace period, the price usually returns to previous levels, and an actual default does not occur.

Other Articles on This Topic

If you found this material useful, please check out other helpful articles on our website:

• “How to Profit from Bonds: Tips for Investors” — this article details how to build a portfolio of bonds, how to calculate yields, and provides practical examples.

• “What are OFZ and Where to Buy Them” — learn about federal loan bonds: why they are reliable, how their yield is formed, and where (on which platforms) they can be purchased.

• “Bond Ratings: What They Are and How to Use Them” — we will explore how rating agencies assess the reliability of issuers, what a bond rating signifies, and how to use this information when selecting securities.

• “Comparing Instruments: Bonds, Deposits, and Stocks” — an article for conservative investors explaining how bonds differ from bank deposits and stocks in terms of risks and returns.

• “How to Choose a Broker for Buying Bonds” — an overview of major trading platforms and brokerage applications, as well as tips on what to consider when selecting a broker to buy bonds.

• “Frequently Asked Questions about Bonds” — answers to popular investor questions about coupons, terms, risks, and other important aspects of bonds.

You May Also Be Interested In

Besides bonds, investors may also be interested in other financial topics and instruments:

• ETFs on Bonds and Diversification. How exchange-traded funds that include various bonds work and why ETFs are often used for portfolio diversification.

• Structured Products and Indexed Bonds. An overview of more complex instruments whose yields depend on market indicators (e.g., inflation indices or exchange rates).

• Government Securities and Guarantees. An article about other government securities (OFZ-N, OFZ-PD) and the role of the government as a guarantor of payments.

• Investing in Stocks. We will explain how bonds differ from stocks and how to combine different assets to balance returns and risks.

• Long-Term Investing. Tips for investments over 5–10 years: how to distribute capital among bonds, deposits, real estate, and other conservative strategies.

• Taxation of Bonds. We will examine the basic rules for calculating taxes on coupon income and ways to legally reduce the tax burden (e.g., through the use of IIS or tax deductions).