MonthMarch 2019

Bond loans: rate of return and interest calculation

Among the various types of financing existing on the credit market there are also the so-called bond loans , explicitly reserved for public limited companies or limited partnerships : as the word itself says, bond loans are based on bonds, have a medium and long term term, and can not be issued for amounts exceeding the paid-up capital and existing in the last financial statements approved by the company shareholders: this means that the maximum capital payable with the bond loan is proportional to the amounts paid by the shareholders by way of risk capital . At this juncture, we want to look more closely at an aspect of bond issues, namely the rate of return and the calculation of interest .

What are the bonds

What are the bonds

First of all, it is good to remember what the bonds are: these are debt securities issued by the public limited company and purchased by investors, who basically lend their money to the company, receiving in exchange a percentage of interest, called a coupon , which has a quarterly, half-yearly or yearly. Those who buy these securities are called bondholders, who take part in company risk as a function of company creditors, even if they are not involved in the management and decision-making processes within the company itself. It is possible, in some cases, to issue bonds for amounts exceeding those indicated in the approved financial statements, or when:

  • The bonds are secured by a mortgage on socially owned properties up to two thirds of their market value
  • The joint-stock company obtains an authorization from the government authority to exceed the limits on the amount envisaged on the basis of the approved budget
  • The guarantee derives from the existence of registered securities issued or certified by the State with a maturity no earlier than that of the bonds

The repayment date coincides with the expiration of one of the coupons and from this day onwards the accrual of interest ends. The repayment of the loan can be done by randomly extracting the serial numbers of the bonds of repayable bonds: in this case, on the basis of the regulation drawn up, the withdrawal date and the withdrawal date are established, and the numbers drawn are published within 10 days in the Official Gazette, so that the bondholders can learn about them.

Rate of return

Rate of return

One of the aspects that most interests the bondholder is the effective rate of return of his credit: to determine this value are various factors that actually make this type of financing different from other types of loans. These peculiar factors are the value of the nominal rate of the loan, the issue price and the redemption price: for this reason the difference between the amount paid to the bondholders at maturity of the coupon and the issue price is a value subject to withholding tax. tax provided for interest and premiums.

The bonds can also be placed by the same company for shares directly on the market with the indications of the credit institutions from which it is possible to make the payments: in this case the date of payment of the amounts of the obligations coincides with the moment in which it is enjoyed. of these. If the payment is earlier or coincides with the date of use of the bonds, the subscriber must only pay the issue amount, if instead it is later the same is required to pay an additional sum for the accrued interest accrued in the period not covered.

Calculation of interests

Calculation of interests

Finally, let’s see how the amount of interest payable is calculated , for which it is necessary to evaluate the payment dates and the dividend period: if the coupon’s maturity does not coincide with the date of January 1, a passive rate must be established to calculate the portion of interest accrued in the period of time between entitlement and 31 December, while if this maturity is between 1 January and 1 July the accrual of interest is to be considered complete, for which it is possible to calculate the obligations for the part of the net amount reserved for bondholders and the debt for withholding tax from the tax authorities. In the event that the payment is after the date on which the obligation is used, the calculation of the interest is set at the nominal value of the rate for the days of non-payment.

All about bonds

The investment world is divided into three major asset classes: equities, bonds and cash equivalents. Today, We offers you a summary of everything you need to know about bonds.

What is an obligation?

What is an obligation?

Bonds are fixed income securities issued by entities that wish to raise funds. When you buy a bond, you lend money to that issuer. This money is refunded in full at a later date (called the “due date”). In the meantime, it is also possible that the entity regularly pays you interest (called “coupons”). The holder knows the exact amount he will receive if he holds his bonds until maturity, which is why they are qualified as “fixed income” securities.

There are two main types of bond issuers: states, local governments or municipalities and companies. For these entities, bond issues are an alternative source of financing for bank loans.

What are the characteristics of a bond?

What are the characteristics of a bond?

Bonds have different interdependent characteristics that determine their value:

  • The face value is the amount of principal borrowed, which will be repaid in full at maturity. It is often confused with the course of the obligation, but these two concepts are different. The face value is an amount engraved in the marble, while the price can fluctuate over time depending on the supply and demand in the market. If a bond is trading at a price lower than the principal, it is said to have a “haircut”. Conversely, if its price is higher, it is called “premium”.
  • The coupon : the coupon corresponds to the interest rates that the holder will receive at regular intervals as compensation for the amount originally loaned to the issuer. Zero coupon bonds may be issued from time to time. In this case, the issuer offers a discount to the sale and repays the securities at their face value, in order to attract potential buyers.
  • Maturity (maturity) : This is the date on which the issuer must repay the principal to the bondholder. It usually oscillates between one and thirty years, but can sometimes be longer. For example, in 1993, Walt Disney Co. launched a show called “Sleeping Beauty”: with a maturity of one hundred years, the bonds will mature in 2093 and carry an annual coupon of 7.55%.

The price and yield of a bond are inversely correlated, meaning that when one increases, the other falls. In general, the longer the bond’s maturity, the more sensitive it is to price movements.

  • Return on Maturity : This figure takes into account the value of the different coupons and the future price performance of the bond in relation to the original face value redeemed on the maturity date. The price and yield of a bond are inversely correlated, meaning that when one increases, the other falls. In general, the longer the bond’s maturity, the more sensitive it is to price movements.

What are the risks?

What are the risks?

Bonds are often considered less risky than equities. When stock markets are very volatile, investors tend to rush to the relative safety offered by these securities. US Treasuries are generally perceived as “risk free”, as the United States is very unlikely to default on its debt. But this is not the case for all bonds: some can be very risky.

The predominant risk to bondholders is credit risk, which is the risk that the issuer will fail to pay coupons or repay principal at maturity. To allow investors to assess the risks of a bond, credit rating agencies issue ratings to issuers. The purpose of these ratings is to gauge their ability to honor their commitments. The three largest rating agencies are Moody’s, Fitch and Standard and Poor’s.

The predominant risk to bondholders is credit risk, which is the risk that the issuer will fail to pay coupons or repay principal at maturity.

The table below details the rating grids used by these agencies to assess the financial health of issuers:

The debt of issuers rated “AAA” or “Aaa” is considered to combine excellent quality and minimal credit risk. Luxembourg can boast of having this coveted “triple A”.

Bonds rated “Ba1 / BB +” or lower are in the speculative category. The risk of a defect is higher.

Normally, the more a bond is perceived as risky, the higher its yield spread. The spread represents the difference between two returns. For example, bonds issued by a large, financially healthy company tend to have a relatively small spread compared to US Treasuries. On the other hand, the securities of a more modest company whose finances are not in good shape will usually have a larger spread compared to US Treasuries.

Where are the bonds traded?

Where are the bonds traded?

Bonds are traded on the bond markets. When an entity issues bonds to investors to raise funds, these securities are sold on the primary market. Then existing bonds are traded on the secondary market. It is also possible to invest in funds exposed to the bond markets.

In many cases, investors diversify their portfolios by buying different kinds of stocks and bonds, depending on their profile. In general, a defensive (or low risk) portfolio holds a lot of quality bonds. Conversely, riskier portfolios have more shares.

  • Investment
  • Investor profile

The crime of damage

Until not long ago, Article 635 of the Italian Criminal Code punished the CD in general as a criminal offense. damage or rather that behavior that results in destroying, deteriorating, dispersing or making unusable – totally or partially – a movable or immovable property of others or of public utility. More generally, it can be said that they integrated the conduct of damaging all the materially or functionally offensive acts of objects that were not the exclusive property of the agent.

decriminalization

decriminalization

With the legislative decree n. 7/2016, however, our legislator has put in place a massive work of decriminalization which has involved various types of crime, which are no longer criminal offenses but are now punished with simple civil sanctions. These include damage, or rather simple damage.

The aggravated damage, on the other hand, also following the recent reform remained in the area of ​​the criminally relevant.

Simple damage

Simple damage

Therefore, today, the “simple” act of damaging objects that are not the exclusive property of the agent no longer has criminal relevance, but represents a hypothesis of administrative offense.

It is punished with a civil penalty of between 100 euros and 8 thousand euros.

To give some examples, we refer to cases where the object of damage is personal property (such as a mobile phone) or vehicles not parked on the public road or in public parking lots.

We refer, still and merely by way of example, to the luggage and plants of the neighbor.

Aggravated damage

Aggravated damage

As said, however, the hypotheses of aggravated damage remain hypotheses of crime and, therefore, are still criminally relevant. We refer, in particular, to the cases in which the action is committed:

  • with violence or threat to the person;
  • on the occasion of events taking place in a public place or open to the public or of a strike or interruption of a public service or public necessity;
  • on public buildings or buildings intended for public use or worship or on things of historical-artistic interest or on buildings, both under construction and under renovation, or on other things indicated in number 7) of article 625 of the criminal code (existing in offices or public establishments, things subject to seizure or distraint, things exposed to public faith, things intended for public service or public utility, defense or reverence);
  • on works intended for irrigation ;
  • above vine plants, trees, fruiting shrubs, woods, forests, forests, forest nurseries ;
  • on sports equipment and facilities in order to prevent or interrupt the performance of sporting events.

Penalties and procedural aspects

Penalties and procedural aspects

The hypotheses of damage that remain a crime are punished with imprisonment from 6 months to 3 years.

Furthermore, the conditional suspension of the sentence is subject to two alternative conditions:

  • elimination of the harmful or dangerous consequences of the crime
  • provision of unpaid work in favor of the community, if the person convicted does not object, for a fixed period of time not exceeding the duration of the suspended sentence.

Who can commit the crime of damage?

Who can commit the crime of damage?

The damage remains a so-called “common” crime, in the sense that anyone can become an active subject in the relevant case – except, of course, the one who is the sole owner of the good.

Psychological element of the crime

Psychological element of the crime

From the subjective point of view, the general fraud is the psychic element required for the integration of the case in point: it is necessary, that is, that the injurer had, at the time of the commission of the fact, both the conscience and the will to attack the good, and the awareness that this good belonged to others. While the specific purpose of doing harm is not relevant for the purpose of qualifying the fraud (see, on the subject, Criminal Cassation, section II, sentence 13 April 2007, no. 15102).

The Legislator has decided not to punish the conduct harmful to property, carried out as a fault.

Jurisprudence on the crime of damage

Jurisprudence on the crime of damage

Criminal Cassation Section II sentence of 10/23/2014 n. 47705

In terms of damage, it integrates the crime referred to in art. 635 cp the forcing of a lock, as it causes to the thing an irreversible damage – although repairable by man – and a functional and structural modification, not irrelevant even under the economic profile.

Criminal Cassation Section V judgment of 21/05/2014 n. 38574

The crime of damage referred to in art. 635 of the Criminal Code differs from that of defacement or contamination envisaged by art. 639 of the Criminal Code, since the former produces a modification of the thing of others which appreciably decreases its value or even partially prevents its use, thus giving rise to the need for a restoration intervention of the essence and functionality of the thing itself while the second it produces only a temporary and superficial alteration of the “res aliena”, whose original aspect, whatever the expense to be faced, is however easily reintegrated. (Case of alteration of the state of the places in which the SC has deemed immune from censorship the decision of the trial judge who had declared the responsibility of the accused for the crime of damage).

Criminal Cassation Section II sentence of 09/22/2010 n. 37889

The hypothesis of aggravated damage ex art. 635, paragraph 2 no. 3 of the criminal code, in relation to the hypothesis referred to in art. 625, paragraph 1 no. 7 of the Criminal Code (committed on things intended for public use exposed to the public faith), breaking the glass door of a bar in the presence of its owner, as this aggravating circumstance cannot be configured if the thing is kept in a direct and continuous manner by the owner of the well. (The Court also noted that, in this regard, the behavior of the agent who, following a sudden move, also succeeded in damaging the guarded thing, since it must be presumed, unless proved otherwise, that the owner, exercising the custody in a direct and continuous way, both able, using all the precautions and diligence of the case, to prevent the event).

Criminal Cassation Section II sentence of 10/23/2014 n. 47705

In terms of damage, it integrates the crime referred to in art. 635 cp the forcing of a lock, as it causes to the thing an irreversible damage – although repairable by man – and a functional and structural modification, not irrelevant even under the economic profile.

Criminal Cassation Section V judgment of 21/05/2014 n. 38574

The crime of damage referred to in art. 635 of the Criminal Code differs from that of defacement or contamination envisaged by art. 639 of the Criminal Code, since the former produces a modification of the thing of others which appreciably decreases its value or even partially prevents its use, thus giving rise to the need for a restoration intervention of the essence and functionality of the thing itself while the second it produces only a temporary and superficial alteration of the “res aliena”, whose original aspect, whatever the expense to be faced, is however easily reintegrated. (Case of alteration of the state of the places in which the SC has deemed immune from censorship the decision of the trial judge who had declared the responsibility of the accused for the crime of damage).

Criminal Cassation Section II sentence of 09/22/2010 n. 37889

The hypothesis of aggravated damage ex art. 635, paragraph 2 no. 3 of the criminal code, in relation to the hypothesis referred to in art. 625, paragraph 1 no. 7 of the Criminal Code (committed on things intended for public use exposed to the public faith), breaking the glass door of a bar in the presence of its owner, as this aggravating circumstance cannot be configured if the thing is kept in a direct and continuous manner by the owner of the well. (The Court also noted that, in this regard, the behavior of the agent who, following a sudden move, also succeeded in damaging the guarded thing, since it must be presumed, unless proved otherwise, that the owner, exercising the custody in a direct and continuous way, both able, using all the precautions and diligence of the case, to prevent the event).