Federal loan bonds: how to choose and buy

Bank deposit rates are falling following the key rate of the Central Bank.
Against this background, many investors are looking for alternative investment options in the stock market. If you want to invest reliably, pay attention to federal loan bonds - OFZ. In terms of reliability and profitability, they are similar to bank deposits. In this article we will talk about what OFZs are, what they are like and how to invest in them.

What is OFZ

OFZs are bonds issued by the state, namely the Ministry of Finance. The Russian Federation acts as a guarantor for these securities, so they are one of the most reliable. The chance of losing the invested money is extremely small - for this to happen, at a minimum, a default must occur.

When you buy government bonds, you are lending your money to the government. It, in turn, pays interest for this and buys back the securities at a certain price at the end of the term. The average yield on government debt securities is 4–6%.

Before getting acquainted with the types of OFZ, we suggest you understand the terms:

• The issuer is the government or private corporation that issued the bonds. The issuer of OFZ is the Russian Federation.
• A broker is an intermediary who is licensed to operate on the stock exchange. In simple words, it is an intermediary between the investor and the exchange. To invest in OFZs, you need to open a brokerage account.
• The face value is the cost of one bond, set by the issuer when it was issued. The par value of bonds issued by Russian issuers is usually 1,000 rubles. During circulation on the market, the price of OFZ may change.
• A coupon is a certain amount of interest that the bondholder receives for allowing his money to be used.
• The repayment period is the period for which you lend the funds. In simple terms, this is the time during which the government will use your money.

The essence of the concept

Government short-term bonds (GKOs), or if officially government short-term zero-coupon bonds of the Russian Federation are considered to be securities issued by the Ministry of Finance of the Russian Federation. GKOs are registered discount assets that do not have a documentary form and exist as entries on accounting accounts. Served GKO issues as the General Agent of the Central Bank of the Russian Federation.

State bonds had different validity periods (from three months to a year). Each issue could provide for certain restrictions for future owners. It was considered that the issue took place if at least 20% of the total number of issued bonds were sold. Unsold GKOs could be sold later. In addition, there was the possibility of early redemption of GKOs on the secondary market.

OFZ yield

The income you can receive from OFZ consists of three parts:

• return of the face value (the original cost of the paper);
• coupon payments (interest);
• increase in the value of bonds (if the holder wants to sell them).

Let's look at the yield of one bond as an example. Let's assume you purchased OFZ-PK (with constant coupon income) at a price of 1,200 rubles per piece. This bond carries an interest rate of 5% per annum and payments are made once every six months. This means that twice a year the holder can count on a coupon income of 30 rubles. If you buy 100 OFZ, 3,000 rubles will be credited in 6 months.

List

In addition to the QUIK terminal, the list of OFZ-PD can also be viewed on special websites. For example, from the broker FINAM or on the website rusbonds.ru.

Search on rusbonds. You can simply type “PD” in the name or find it using filters. Please note that the "Issue Status" filter must be set to "Circulating"

Below is a compiled list of all OFZ-PD in circulation. With a convenient annual coupon income column. To see the market price, go to QUIK or find this security on the rusbonds website (you will have to register), there in general information there will be the market price of the security for the previous trading session.

Advantages of OFZ

Government bonds have a number of advantages:

• Reliability. The issuer of OFZ is the state, so the safety of the invested money is high.
• Ease of purchase. To purchase securities, it is enough to open an individual investment account or brokerage account and then deposit funds into it.
• Tax benefits. Coupon income on OFZ is exempt from personal income tax (clause 25, article 217 of the Tax Code of the Russian Federation). Tax must be paid only on income from the sale of bonds. And if you buy OFZ through an IIS, you can get a tax deduction of 13%.

Please note: bond yields largely depend on the key rate of the Central Bank. If the Central Bank of the Russian Federation rate falls, the value of securities rises. If an investor purchased OFZs, and the key rate has decreased, the bonds he owns will bring greater benefits relative to “fresh” issues of securities.

Brief description of the development and fall of the GKO market

The start of sales of GKOs immediately caused a sensation. By the generous Central Bank, the bonds were sold at a cost much lower than their nominal value, and were repurchased by the Ministry of Finance after the expiration date at full cost. The difference was huge and could sometimes reach up to 250%. As they would say now, it was a typical pyramid, only it was initiated not by a thieving businessman, but by an entire state.

Like any typical scam project, the government's short-term security quickly began to have problems. Already a couple of years after their issue, the profit from the sale of new bonds did not cover the losses from previous payments. The government chose the most impossible path, devoid of common sense: it began selling state bonds to foreigners. The pyramid began to grow even larger due to colossal injections of foreign currency, which had to be paid off soon.

Everything ended with a natural outcome. When it came time to pay, there was no money. The deficit was of such monstrous proportions that the Russian government declared a technical default and froze payments on GKOs. The domestic currency depreciated 4 times, thousands of enterprises went bankrupt, GDP fell by 70%, millions of citizens who were ordinary investors lost their savings. Currently, the GKO pyramid is a canonical example of a financial scam that has been observed in our recent history.

If we consider GKOs as a pyramid, we can find several distinctive features:

• a very high percentage of profitability that does not correspond to the issuer’s profit;
• making payments to current bondholders from the money paid by new holders;
• the inevitability of the collapse of the financial scheme and the issuer's refusal of obligations.

OFZ-PD

OFZ-PD are bonds for which a constant coupon income is provided. The abbreviation PD means permanent income. You receive it every 6 months. The amount of coupon income is known in advance. It is determined at the time of issue (issue) of bonds. These are the most popular securities among investors.

When the profitability of financial instruments decreases, it is advisable to purchase bonds with constant income (that is, OFZ-PD) for a long period. Against the backdrop of general statistics (for example, when rates on bank deposits fall), profit on OFZ-PD will become more and more attractive every year. After all, the income on coupons is established at the time of issue, which means it cannot change.

Types of amortizing bonds

Like ordinary debt securities, they differ by issuer:

• state or OFZ (the abbreviation -ad is added to the name).
• municipal;
• corporate.

Explanation OFZ-ad - federal loan bonds with debt amortization.

Each paper has its own algorithm and features of debt amortization.

A few examples:

1. First depreciation payment. Depreciation can start from the second year, after 3 years, 5 years and so on (from the date of issue). That is, without an amortization period, bonds will look more like regular bonds with a constant coupon.
2. Repaying the debt in equal installments every year (or after an equal period of time). For example, 10% of the nominal value.
3. Depreciation in equal shares. The first payment is 10%, the second is 15%, the third is again 10%, the fourth is 5%, the fifth is 25%.
4. Repayment of debt at various intervals. For example, the first payment will be in 3 years, the next in a year, then in 1.5 years. And so on.

Federal loan bonds (OFZ-ad). Smooth payment schedule and repayment in equal installments. Simple and clear.

Repayment schedule (depreciation) for OFZ-ad

An example of municipal bonds. Released into circulation in July 2017. The first debt amortization is scheduled in 4 years with “kopecks”. The frequency of payments is “ragged”. The debt is repaid in unequal installments.

Debt amortization on municipal bonds

Need to know! Payments of principal and coupons may not coincide in time.

OFZ-PK

OFZ-PK are debt securities with a variable coupon (PC). The coupon of such bonds depends on the average value of RUONIA (“reference” rate). In simple words, this is the rate at which various Russian banks issue loans to each other in rubles. Usually it is close to the current key rate of the Central Bank.

RUONIA is an indicator that gives an idea of ​​the state of the financial market. If the key rate, as well as rates on deposits and loans, increase, the value of RUONIA will also increase. The higher this indicator, the greater the profit on coupons that OFZ holders can expect.

OFZ-IN

In this case, the abbreviation “IN” implies an indexed denomination. These bonds have the smallest coupon yield - only 2.5%. Currently, only one issue of bonds with ID can be purchased on the market - OFZ 52001. The holders receive coupon payments every 6 months.

The OFZ denomination is indexed to inflation every 12 months. It is profitable to purchase debt securities with an indexed par value at a time of high inflation. There is also a drawback - “inflationary” income can only be received at the end of the maturity period, as well as when selling the bond.

Where to look for information

On the website about bonds - rusbonds.ru. We go through free registration (without it, it does not allow us to search and select papers).

Go to “Search”. We set filtering for selection by parameters:

• Issue status: “In circulation”
• Depreciation - “Yes”

If desired, in the “Market sector” field, you can select by type of bonds: OFZ, corporate or municipal.

Features of investing in OFZs through IIS

If you want to receive more from investments in OFZs, buy them into an individual investment account. An IRA is a type of tax-advantaged brokerage account. By opening an IIS, an investor can receive a bonus from the state in the form of a tax deduction.

There are two types of deductions for IIS:

• Type A (contribution deduction). It allows you to return 13% of the tax on the amount deposited in the IIS, but not more than 52,000 rubles per year. The amount of the available deduction depends on the personal income tax paid for the year. This type of deduction is suitable for investors who receive “white” wages.
• Type B (income deduction). Allows you to avoid paying 13% personal income tax on investment income. The deduction is suitable for active investors who expect to make money trading securities.

Please note that IIS has several limitations:

• The minimum investment period is 3 years. If you close the IIS earlier, the right to tax benefits will disappear, and deductions already received will have to be returned.
• You can deposit up to 1 million rubles into your account during the year.
• You can top up your IIS only in rubles.
• You can only open one IIS. If you want to open a new IIS with another broker, you will have to close the current one.

How to buy OFZ on IIS

To purchase government bonds using an IIS, you need:

• Open an individual brokerage account with a reliable broker. For example, in BCS you can open an IIS online in the BCS World of Investments application. The whole procedure will take no more than 10 minutes - you just need to fill out a simple registration form and follow further instructions.
• Top up your IIS in any convenient way.
• Buy suitable OFZs. If you find it difficult to choose, you can seek help from a financial advisor.

What to remember

• OFZs are debt securities. They are issued by the Ministry of Finance of the Russian Federation. By buying government bonds, you are lending money to a reliable borrower—the state. The risks of investing in OFZs are lower than in other investment products.
• OFZs are issued for a limited period. During this period, the holder receives coupon income. The redemption date of the coupons and their size are known to the investor in advance.
• To purchase OFZ, you need to open a brokerage account or IIS. In case of purchasing government bonds on an individual investment account, the investor can count on tax benefits from the state. The income will consist of coupon payments and an annual tax deduction - 13% of the amount deposited into the IIS. Thanks to the deduction, you can get up to 52,000 rubles per year.

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