Difference Between Structured and Unstructured Bonds

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L’obligation it is a credit title that gives the investor, precisely called bond, the right to receive, at predefined dates, the reimbursement of the subscribed capital and remuneration in the form of interest. The two main types of bonds are those structure and those unstructured.

Structured and unstructured bonds

Bonds can be issued by the state or another public body, by a supranational body, by a bank or by another type of company. For all these subjects, the obligation represents a debt. In addition, in some cases, it is possible for the holder to convert the bonds into shares of the company, following the procedures established by the company itself.

Bonds are divided into structured and unstructured bonds. The main difference is that thestructured bond includes a derivative component. This allows the subscriber to perceive a random return linked to the performance of one or more Underlying strengthssuch as stocks, stock indices, commodities, currencies.

In other words, structured bonds are complex securities, consisting of a traditional bond component and a derivative. In the first part, there is a low-risk security, with a fixed or guaranteed minimum coupon. Instead, for the second part, the return or principal repayment itself is tied to a basket of indices. Therefore, this characteristic makes a structured bond risky, because it is linked to the performance of an underlying security or index and, sometimes and if the type of structured bond does not provide for it, does not guarantee the full principal repayment.

The different types of structured bonds

There are several subtypes of bonds that are part of structured bonds. There are for example the guaranteed capital bonds. In this case, even if an undesirable negative event occurs, the capital invested can be fully reimbursed to the saver. This does not happen if the bond is not principal guaranteed. In this case, the possibility of receiving, at maturity, a reimbursement lower than the invested capital is therefore not excluded.

Structured bonds are also distinguished according to the type of index considered. In the case of a title linked indexthe variable is one or more stock market indices, whereas in the case of a stock index, the variable is composed of one or more underlying actions. Finally, if the indexing parameter is represented by commodities, such as gold, it is linked to a commoditywhile if it is determined by one or more foreign currencies, it has a title forex linked.

There are also titles callable And puttable. These are bonds that respectively allow the issuer and the investor to make early redemption of the security. In the first case, it is the issuer of the security who insures against the negative event, ie against a drop in market rates. If this happens, in fact, he will be able to redeem the bond early, avoiding paying the investor a coupon higher than that paid on average by the market. Instead, if the binding is of type puttable, it is the bondholder who has the right to request early redemption of the security. In this way, if market rates are higher than the yield offered by the bond in question, he will be able to buy, with the principal obtained in advance, other securities at a lower price and obtain a higher yield.

Other types of structured bonds

Other structured notes are those of a minimum coupon Oh maximum coupon. The first type is a form of insurance for the investor, who will obtain an annual coupon of at least a certain predetermined percentage, regardless of the performance of the underlying variable. On the other hand, securities with a maximum coupon are insurance for the issuer, who will not risk paying the bondholder a coupon above a certain threshold.

Finally, the other types are:

  • obligations Floorwhich provide for a minimum yield below which the obligation cannot fall;
  • obligations Capewhich, on the other hand, have a maximum remuneration limit;
  • those intensify Where resignin which the yield increases or decreases over time;
  • those inverted convertible, which mixes a standard short-term ordinary bond and an option contract to buy a specific underlying;
  • structured bonds Fixed float.

The latter, in particular, are a variable-yield instrument where, for the first short period, a fixed and high interest rate is paid. While, in a second phase, they are transformed into structured bond instruments that have income linked to market indices.

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