What Are Commercial Bonds?

Three types of bonds are available to investors on the stock market by a financial intermediary: classic, exchange-traded, and commercial. The main differences between the issues of different types of bonds for issuers are in the requirements for sets of documents, terms of consideration, information disclosure, and registration costs.

Commercial bonds are loans raised by the issuing company from a financial intermediary. In essence, it is borrowing on trust, the degree of which is expressed in the value of the interest rate. It would seem that the higher the rate, the more attractive, but no! The main risk of business bonds is an incorrect assessment of the issuer's credit quality. And the higher the rate, the more care and scrupulousness the investor needs to show when making a decision.

Circulation on the over-the-counter market and initial public offering by private subscription make CBs similar to bank loans and promissory notes. "What does the bill of exchange have to do with it?" You ask. And we will answer.

Since the appearance of business bonds to the present day, most of these issues are “club” issues, designed for several large investors. Such transactions were previously carried out by companies for domestic lending. And now the nature of the initial placement allows the use of CBs for intra-group lending of the issuer. According to lawmakers, the mission of CBs in the market was initially to create an alternative for the unregulated bill market.

What to look for when choosing commercial bonds?

Having analyzed the history and features of business bonds in a little more detail, one can come to the conclusion that they have not so many differences from exchange-traded bonds. Both financial instruments by financial intermediary have the same essence - this is the issuer's public debt. From the point of view of protection, all the same, provisions apply to commercial bonds as to ordinary bonds.

But there are still some differences between exchange and commercial bonds.

•    Firstly, even if there is control on the part, the issuer of business bonds is not obliged by law to disclose information to the extent that the issuer of exchange bonds should do it.
•    Secondly, business bonds are characterized by limited liquidity in the secondary market, since from the point of view of listing these securities are not related to the exchange and are not traded on it, that is, you will not find them in the broker's application.

Pros of commercial bonds:

•    Higher yield than comparable exchange-traded bonds
•    CO can be partially or fully sold on the secondary market
•    Commercial bonds are sold at par in the secondary market
•    There is no volatility.
•    Cons of commercial bonds:
•    Difficulty buying during the initial placement (due to the placement procedure by private subscription)
•    High entry threshold for investors (including broker and depository commissions)
•    Information vacuum around the issuer (due to the absence of a mandatory requirement for the issuer to disclose information).