Bond issuance enables companies and the government to raise capital from the public, in a process that is similar to talking a loan from a bank. The company that issues the bond returns the debt on a predetermined date. The investor that purchases the bond in effect gives a loan to the entity that issues the bond.
The bond is traded on the stock exchange and can be bought and sold without any connection to the repayment date of the "loan". A bond is the primary financial instrument for solid investments. The bond guarantees a predefined yield and the ability to profit from trading in it in the short term in the event that the price rises in the market after the purchase.
Government bonds can also be bought on the ASE - bonds issued by the government in order to increase its revenues, reduce government deficit and improve its services to its citizens. The government is the largest debt issuer on TASE.
Many companies choose to raise money to finance activity by issuing bonds
, and sometimes they choose to do so in addition to issuing shares
In terms of investors, the difference between these two instruments is that the bond holders receive regular periodic interest payments from the issuing company. Unlike shares
, bond investors have no additional rights and they do not take part in the management of the issuing company. and do not influence its decision making process.
How is the risk level of corporate bonds determined?
The risk level of the bond is determined by the financial status of the issuing company and the collateral given to investors in the issue. The collateral determines the priority of bond payments over other liabilities of the company (for example, bond purchasers will receive priority over loans from other entities).
There are rating companies abroad and also in Israel that analyze the company's condition (for a fee) and publish a rating that attests to the company's ability to repay the debt to the bondholders. Currently, two rating firms provide these services in Israel – Maalot
Are bonds considered a solid investment?
Investment in bonds is usually classified as a solid investment (relative to investment in shares), but its yield potential is lower, and it is expected to be less profitable than investing in shares.
At the same time, it should be noted that the bonds differ in their investment ratings, which significantly affects the level of risk.
Therefore It is customary to divide corporate bonds into categories: investment grade bonds (companies with a credit rating of AA+ to BBB) and non-investment grade bonds, known as junk bonds (companies rated BB + to C), בהזנה לאתר צריך להצמיד את הפלוסwhere investment is considered riskier. The high yield of non-investment grade bonds is a risk premium that compensates investors for their consent to invest in bonds of a company that is in danger of no longer continuing its operation. Should the company run into difficulties and start liquidation processes, bond holders have priority over shareholders.
What are structured bonds?
Investment houses sometimes choose to issue financial products that meet the different needs of investors through bonds. These products are called "structured bonds". In contrast to the "ordinary" bonds on which the interest is known in advance, the interest rate of structured bonds depends on the behavior of a financial variable (the stock index, the dollar or the euro exchange rate, etc.) and therefore the investor may benefit from higher yields relative to other instruments.
Government (Treasury) Bonds
Government issued bonds can also be bought on TASE. The government issues these bonds in order to increase its revenues, reduce government deficit and improve its services to the citizen, as do governments around the world. The Government of Israel
, which issues bonds through the Government Debt Management Unit
at the Ministry of Finance
, is the largest bond issuer on TASE.
Government Bond Types
Several types of government bonds are traded on the TASE:
- Fixed interest bonds, unlinked to the consumer price index (ILGOV5.5 01/42 formerly Shahar).
- Non-coupon bonds: issued at a discount - a value that is lower than their nominal value, for a short term. The investor's profit derives from the difference between the issue price and the redemption price - which is the face value (Ministry of Finance T-Bill).
- Floating-rate bonds, unlinked to the consumer price index. The variable interest rate is determined by the weighted average yield to maturity of selected series of Makams (Bank of Israel – New Gilon, formerly Gilon).
- CPI-linked bonds (Bank of Israel - Galil).
In addition, the Bank of Israel issues Makams
(Israeli T-bills) in order to absorb monetary surpluses in the market.