OFZ and Corporate Bonds: What the Premium Pays You For

The premium of a corporate issue over an OFZ of comparable maturity is neither a reward for boldness nor the mark of a "more generous issuer". It is the price of a set of risks that a sovereign borrower does not take on and a company does: the risk that the money will not be repaid in full or on time; the risk that the bond cannot be sold at a reasonable price; the risk that your investment horizon turns out to be different from the one you counted on, because the prospectus contains a put or call option or an amortisation schedule. Breaking the premium down into these components is the only way to understand whether you are being paid for the risk you are actually prepared to bear, or whether you are simply being compensated for illiquidity you never thought about.

What the premium is measured against

The premium is not an absolute figure but a difference. The comparison is not coupon against coupon, but the yield to maturity of the corporate issue against the yield of the government curve at the same maturity: that is the spread to the curve. The coupon rate is of no use for the comparison at all — it is tied to the face value, whereas you buy at the market price, and accrued interest also enters the calculation.

This leads to a common mistake: the reader takes a yield figure from the broker's terminal and compares it with a figure from another source. These are different quantities under the same name — simple yield, effective yield, yield to the option date. These differences are covered in a separate piece: how a bond's yield is calculated. Until you know exactly which number is in front of you, any discussion of the premium is pointless.

Credit risk: the main component

The state borrows in its own currency and services its debt in that same currency. A company borrows in a currency it does not issue and services its debt out of the cash flow of a specific business. Everything that lies between those sentences is the credit part of the premium.

It cannot be read from one indicator. Investors look at the debt load relative to earnings before deductions, at how well operating cash flow covers interest payments, and at the repayment schedule — how much debt the company will have to refinance in the coming years and in what kind of market. A company with moderate debt but a large redemption looming at a time when money is expensive is riskier than a company with heavy debt spread out over time. The raw data for such a check can be found in issuers' financial statements.

The rating scale aggregates all this into one label, but the label is updated more slowly than the market moves. A bond's spread usually widens before the rating is revised — the market reprices the risk without waiting for the agency.

Liquidity: the premium you are paid for inconvenience

The second part of the spread has nothing to do with solvency at all. A top-tier issue trades in depth, and you can exit it at close to the screen price. An issue from a small company may sit with a wide gap between bid and ask, and sometimes with no opposing order of the required size at all.

This premium is a fair one: you are paid for agreeing to hold the bond to maturity and not counting on an exit. But it turns into a loss at the very moment you need the money ahead of schedule. Liquidity has to be assessed before the purchase, using trading volumes in the bonds section, not at the moment when you already have to sell.

The structure of the issue changes what you have bought

A corporate bond is almost never built as simply as a classic OFZ redeemed on one date.

• Put or call option. The right to tender the bond to the issuer early, or the issuer's right to buy it back. Where the option is exercised at the issuer's discretion, the coupon is often reset after it, and a holder who missed the date is left with a bond on terms they did not choose.
• Amortisation. The face value is returned in instalments according to a schedule, so the average life of the investment is shorter than the formal maturity date, and the coupon in roubles shrinks along with the outstanding principal. The mechanics are explained in the piece on amortisation.
• Subordination. If the issuer runs into trouble, these obligations are met after senior debt, and bank subordinated bonds can be written off. Here the premium pays not for the term but for your place in the queue.

The holder tracks the dates of options, coupons and redemptions on their own — they belong to corporate actions and appear in the events calendar.

Taxes and the currency dimension

Coupons on both government and corporate issues are subject to income tax; as a general rule, there are no reliefs based on the type of issuer. The construct that matters for the calculation is the tax-free allowance on investment income: 13%. It makes sense to calculate the premium after tax, otherwise the comparison with other instruments will be skewed.

A separate case is replacement bonds: there, currency revaluation is added to the credit premium, and the nature of the return changes so much that they cannot be compared directly with rouble OFZ.

A checklist before buying

Step 1 — determine the term for which you are truly prepared to part with the money, and take the OFZ yield at that maturity as your reference point. Step 2 — look at the corporate issue and break down the difference: how much of it is down to credit quality, how much to liquidity, how much to the structure of the issue. Step 3 — check the prospectus for a put or call option, amortisation and subordination. Step 4 — recalculate the result after tax and only then compare it with the alternatives, including a deposit, which has a different risk profile despite a rate that looks similar.

The terms encountered along the way are explained in the glossary.

What this piece does not give you

There is no assessment of specific issuers here, nor any claim about what size of spread counts as "normal": the normal level depends on the phase of the rate cycle and changes along with it, and the proper place to look at current values is the data in the site's sections, not the text of an article. The premium does not guarantee a result — it describes what you are paying for with risk.