How to Choose a Bond: A Step-by-Step Guide

A bond is chosen in a strict order: start with who is borrowing and what backs the debt, then look at how the issue itself is built (maturity, coupon type, amortisation, embedded options), then at the price you pay to get in and what is left of the coupon after tax and fees, and only at the very end at how easy the paper is to exit. The order matters more than any single figure: an issue with an attractive coupon and a weak issuer is not a high-yield bond but a loan you have granted without reading who the borrower is. All the values — yield, coupon, duration, price — are shown on the page of the specific issue in the bonds section; what follows is about what exactly to read in those values.

Step 1. Who is borrowing and what backs the debt

Begin with the issuer, not with the yield. Government debt, OFZ, and corporate debt are obligations of a different nature: the state has a tax base and the ability to refinance, while a company has only the cash flow of its business and its access to the capital market. For a corporate issue, look at the issuer's financial statements: how sustainably the debt can be serviced shows in the ratio of debt to operating profit, in the repayment schedule and in whether operating cash flow covers interest. A useful technique is to set the debt issue against the shares of the same issuer, if they are traded: the page for {{instrument:SBER}} and its multiples, for example 3,77, describe the same business from another angle.

Check separately who exactly the debtor on the paper is. Sometimes the borrower is not the operating company but its financing subsidiary, and the obligation rests on a guarantee from the parent structure. That is not a flaw in itself, but it is a different risk, and it should be visible in the terms of the issue.

Step 2. How the issue is built

Next comes the structure. A coupon can be fixed, floating (linked to the key rate or to RUONIA) or inflation-indexed. These are not shades of the same thing but opposite bets on the future: with a fixed coupon you gain when rates fall and lose when they rise, with a floating coupon it is the other way round, and an indexed coupon protects purchasing power but does not let you know the cash flow in advance.

Check for amortisation: if the principal is repaid in instalments, you receive money ahead of maturity and have to reinvest it somewhere — at a rate that is not yet known. And be sure to check for an embedded option.

Step 3. Price, face value and accrued interest

The price of a bond on the exchange is quoted as a percentage of face value — but you pay more than that: on top comes accrued interest, that is, the part of the coupon that has built up since the day of the last payment. If you buy the day before the coupon date, you pay almost the whole of that coupon to the seller and get it back as the payment. There is no gain whatsoever in "buying for the coupon" — it is moving money from pocket to pocket, with the difference that the tax will be withheld from you. Payment dates for a specific issue can be found in the events calendar.

Step 4. Yield and what it promises

Current coupon yield — the coupon relative to face value — is a reference figure. The number to work with is yield to maturity: it takes into account the entry price, accrued interest and the return of principal. But it carries a built-in assumption — that you will reinvest every coupon you receive at the same rate. In reality rates change, so yield to maturity is not a promise of a result but a way of comparing issues with each other in a common language. A separate yield is calculated to the option date, and for a bond with a call option it is sensible to go by the worst of them.

Step 5. Sensitivity to interest rates

The longer the issue and the fewer the interim payments, the more its price moves when the key rate changes. Formally this is duration; in practice it is the answer to the question "how much will I lose if I have to sell before maturity". If you firmly hold the paper to maturity, price swings do not concern you: you will receive face value. If your investment horizon is shorter than the term of the issue, those swings are your main risk, and it is worth measuring it in advance, following the same logic as described in the piece on how to assess the risk of a position.

Step 6. Liquidity and the cost of exit

With smaller issuers, trades are rare and the spread between the bid and ask prices is wide. Buying such a bond is easy; getting out on the day you need to is not always possible. Look at trading volume and order book depth before the trade, not after it. Fees and access to particular venues depend on the intermediary — this is covered in the article on how to choose a broker.

Step 7. Taxes

Bond coupons are subject to personal income tax, and as a rule it is the broker that withholds it. The current thresholds and the tax base are a legal constant, not a market variable: 13%. Account for tax before you compare issues, otherwise you are comparing different quantities: for bonds with a different share of coupon income and a different entry price, tax eats into the result in different ways. Unfamiliar words are explained in the glossary.

What this walkthrough does not give you: it does not point to a specific issue and it does not estimate the probability of default — no publicly available indicator measures that, and a credit rating merely ranks issuers relative to each other.