OFZ or nostalgia for the 90s: why do we need Federal Loan Bonds

The yield on bank deposits has been falling significantly recently. In this situation, many Russian residents are forced to look for alternative ways to profitably invest their savings. If a person does not want to take too much risk, then he is often offered to “lent” to the state by purchasing OFZ (federal loan bonds). They are issued by the Ministry of Finance and traded on the stock exchange. For many, the concepts of OFZ, stock exchange and others seem quite complicated. Brokers do not waste time talking about what federal loan bonds are in simple words, what they are like and how to make money on them. But this tool is of interest to many.

What is OFZ

A bond is a debt instrument with a predetermined return. With their help, issuers borrow money for a certain time and then return it. They pay interest (coupons) for using the funds. Repayment of the principal debt is carried out on predetermined dates, either in full or in parts. Simply put, buying a bond is lending money at interest to the person who issued the security.

Typically, the issuers of these securities are various companies. OFZ is a special type of bond. They are issued not by a private company, but by the state represented by the Ministry of Finance. The reliability of such papers is much higher. Defaults on government debt are extremely rare and can usually be predicted quite easily. It is generally accepted that OFZs are even more reliable than bank deposits.

Important. The reliability of investments in ordinary OFZs largely depends on the reliability of the broker through whom the securities were purchased. Sometimes brokers steal money and assets from clients' accounts. However, such situations are rare.

Kinds

The Ministry of Finance constantly attracts investor money for various purposes. This is why OFZs are issued. They have different yields and maturity dates. In addition, the par value of a bond may not be constant. For example, for OFZ-ID securities it is indexed, and for OFZ-AD it is amortized, i.e., paid in installments.

There are several types of OFZ and by type of coupons:

with permanent coupon
with fixed coupon
with variable coupon

Each type of bond serves a different purpose and is of interest to investors with different risk appetites.

With permanent coupon

The most popular among investors are federal loan bonds with a constant coupon (OFZ-PD). The income from them is known in advance. Even at issue, the size of the coupons is determined. It cannot change until the paper matures. In fact, this type of paper is very similar to deposits. OFZs with a constant coupon include, for example, OFZ 26205.

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With fixed coupon

Bonds with a fixed coupon (OFZ-FD) also have a pre-known yield. But the rate on it changes. All changes are agreed upon in advance. For example, the first year the coupon can be paid at a rate of 7%, and in the second - at 8%. With OFZs with a fixed coupon, there is no problem calculating income in advance. An example of such securities is OFZ 46011.

With variable coupon

Federal loan bonds with variable coupons do not allow you to calculate the yield to maturity in advance. The coupon for them changes over time and is tied to the RUNOIA rate. This indicative indicator has been calculated since 2010. It displays the cost of borrowing funds for Russian banks on an overnight basis. The size of the coupon may increase or, conversely, decrease over time. An example of securities in this category is OFZ 29012.

Types of OFZ

To calculate the yield, you must first find out what types of government bonds are divided into.

Bank bonds

OFZ at par

Any OFZ has a certain nominal price - as a rule, it is 1000 rubles. Theoretically, if you have 1,000,00 rubles at your disposal, you can already lend to the Russian government. But bonds are not traded at their nominal price on the market, but as a percentage of their nominal value.

Let's say one bond is trading at a price of 105 (%). This means that the real value of the security is not 1,000 rubles, but 105% of 1,000 rubles. = 1,050 rub. The real cost can be either more than 1,000 rubles or less than 1,000 rubles. If one OFZ with a face value of 1,000 costs 95 (%) - this means that its real value is 950 rubles.

The OFZ bonds at par include the following types of bonds:

OFZ-IN. The zero-coupon yield is formed based on the CPI (consumer price index) in Russia.
OFZ-AD. The first issue of securities with debt amortization in Russia was carried out in 2002.

The main difference between an obligation with debt amortization and a regular one is that the maturity date usually begins after a certain period of time. (For example, it may be issued in 2020, and repayment on it will begin only in 2020.) Quite often, such securities are issued for the Pension Fund.

By payments

Funds will be accrued daily, with payments once every six months. Coupon income (CI) – what is it? This is the money that the company (in this case the state) will pay you for the fact that you lent it money:

With a constant income. Payments are fixed for the entire validity period and do not change, i.e. the investor receives the same amount over a certain period of time. For example, if the obligation was issued in 2009, coupon payments would be made every 182 days.
With a fixed coupon. Since 1999, the Ministry of Finance of the Russian Federation began to issue this type of bonds. In fact, the name has nothing to do with reality, since the coupon rate may change over time. However, the investor will learn about all changes in advance. For example, for a certain time an investor receives payments of 8%, and then his income decreases to 7%.
With variable coupon income. To calculate profits, inflation and index indicators for one-day ruble deposits are used. Profit/loss depends on the behavior of money market rates.

Payments occur within certain periods

Which ones to choose

In terms of reliability, OFZs of different types and issues are virtually the same. But you still need to approach their choice responsibly. Before purchasing, you must decide on the period for which the investment is being placed and how you plan to use the coupon. It can be reinvested or spent on personal needs.

There are several schemes for selecting federal loan bonds:

Selection of securities by maturity. The simplest option. For example, if you plan to spend the invested funds in a specific month, then it makes sense to select securities with maturity in that month. In this case, you do not have to take any action, but simply hold the securities until they are redeemed.
Investment for a year. This option is somewhat more complicated than the first. It involves purchasing bonds that will mature in about a year. After repayment, the investor again purchases OFZs with an approximate maturity of 1 year, etc. This method allows one to reduce dependence on changes in rates.
Investing to receive passive monthly income. Income from OFZ is paid every six months. To receive monthly payments, you must have at least 6 different bond issues in your portfolio.

If you don’t have time to independently choose a portfolio of federal loan bonds, and you don’t want to consider other assets due to higher risks, then you can always consider purchasing shares of exchange-traded mutual funds. For example, the SGBG mutual fund from Sberbank - Asset Management includes more than 20 different OFZs. It is aimed at conservative investors and is almost always growing. Coupon income is reinvested in it. But we must take into account that BPIF involves the payment of a commission. In the case of SGBG, it will be 0.8% of the asset per year. Naturally, the broker will also have to pay for transactions in accordance with the current tariffs.

How to buy

You can purchase it on the Moscow Exchange through any Russian broker. The entire procedure can be divided into several steps:

Concluding an agreement with a broker and opening a brokerage account or IIS. It is recommended to clarify in advance that the selected company provides access to transactions on the Moscow Exchange. However, all Russian brokers usually provide it.
Top up your brokerage account (IIS). Usually money is paid by interbank transfer. But some brokers also provide other ways to replenish accounts, for example, directly from a bank card.
Buy the necessary bonds. To do this, you need to create an application for the desired type of OFZ through a terminal or application, and then wait for its execution by the broker.

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The possibility of purchasing OFZ on an IIS gives the right to use the personal income tax deduction. But it must be taken into account that when withdrawing money from an IIS before the expiration of the 3-year period, the right to deduction will be lost, and if the money has already been returned to the Federal Tax Service, then it will have to be transferred to the budget again.

Important. An IIS can be opened exclusively by a Russian tax resident. In fact, this is a brokerage account with the possibility of receiving personal income tax deductions. In this case, a deduction can be provided for the entire amount of income or for invested funds. It is the second option that is especially interesting for those who are planning to invest in OFZs. But you need to understand that to receive a deduction you must have income subject to personal income tax, and the deduction cannot be more than the taxes paid or 52 thousand rubles. in year.

There are also “people’s” OFZ-n bonds. They are sold through banks (VTB, Sberbank, Promsvyazbank, etc.). The minimum investment amount in this case is 10 thousand rubles. The investor is not required to have any special knowledge or accounts. You can make a purchase in an online bank or office. You will not have to pay a commission when purchasing OFZ-n.

How to buy people's bonds?

The sales agents for the new OFZs are Sberbank and VTB24, which have opened a subscription to government loan bonds, which is available to owners of “Personal Accounts” on websites. Starting from April 26, the buyer can submit applications via the Internet or visit the bank in person. The purchase of public bonds is carried out exclusively in branches. A commission is charged to financial institutions. Today's tariffs are:

1.5% for the purchase of OFZ in the amount of up to 50 thousand rubles;
1% for purchases in the range of 50-300 thousand. rubles;
0.5% if the volume exceeds 300 thousand rubles.

Exchanges and brokers do not trade new OFZs, and they cannot be used as credit collateral. The transfer of property rights is possible only in the form of inheritance to individuals; there are no other ways to transfer property.

Of the documents required to purchase public bonds, banks only require a passport, which is used to create a brokerage account. This is the name of a banking service that involves operations with securities, the possibility of which distinguishes it from a deposit.

How to sell

Federal loan bonds are also sold on the Moscow Exchange. An investor does not have to wait until the maturity date of the paper to receive funds. In this case, the buyer will have to pay not only the cost of the bonds, but also the accumulated coupon income. To sell securities, you just need to create an order through the terminal or smartphone application of your broker and wait for it to be executed.

Important. The value of bonds, like other securities, is subject to change. At the time of sale, it may be either higher or lower than face value. No one has canceled the rules of the market. However, sharp and long-term drops in value usually do not occur. The sale is carried out through the bank where they were purchased. In this case, the rule applies: if a person has owned the securities for more than a year, then he will receive the amount of investment and interest on coupons, and in other cases - only the invested money. There is no sales commission.

OFZ or nostalgia for the 90s: why do we need Federal Loan Bonds

Starting from April 2020, the Russian Ministry of Finance plans to begin issuing government bonds, notorious to the population, under the new name OFZ (Federal Loan Bonds). In fact, every citizen will be able to lend to the state for a certain period and at a certain percentage. The total volume of the first issue will reach 2 billion rubles, and the average annual yield will be 8.5% per annum. Let's figure out whether it's worth using this financial instrument to strengthen the family budget.

Fresh legend...

This type of securities is not new to Russia. Everyone who witnessed the USSR and its collapse at a conscious age remembers OGSS (State Savings Loan Bonds) very well. Their profitability completely disappeared by 1992 due to hyperinflation, and then was finally destroyed by the 1998 default. GSZs were replaced by GKOs (state short-term bonds), the yield of which was supposed to be as much as 140% per annum. After the economic crisis of 1998, GKOs depreciated threefold, and the state stopped all payments on its treasury obligations. This became one of the largest government financial scams in all post-Soviet times.

Given such a sad experience, lending to the state does not seem to be the most attractive prospect. But before drawing final conclusions, you need to understand the details.

What is the yield of OFZ

OFZ-2017 are issued for a period of three years. If you buy bonds in April of this year, then after three years you must hand them over to the state, receiving the invested money with interest. Of course, the bonds can be withdrawn earlier. However, in this case their profitability will be significantly lower. In addition, banks will charge a 1.5% commission for early presentation of paper. Therefore, if you are not sure that you can hold OFZ for three years, then there is no point in using this financial instrument.

To stimulate long-term investment of money, the state provides a flexible system of rates. After a year, you can withdraw your investments with a yield of 7.5% (this is the minimum rate), and after three years it will already reach 10.4%. Thus, the average annual return will be 8.5%, which we have already mentioned.

How to buy OFZ

The face value of one federal loan bond for individuals will be 1,000 rubles. At the same time, the minimum amount of bonds purchased is 30 thousand rubles, and the maximum is 25 million rubles in one issue. OFZs are planned to be issued every six months.

It will be possible to buy bonds at Sberbank and VTB 24. To do this, you will need to come to a bank branch, open the necessary accounts there and sign an agreement, becoming the owner of the securities. If you already have a personal account in the online banks of Sberbank or VTB 24, then you can buy OFZ remotely. In the future, other banks may be connected.

It will not be possible to buy OFZ-2017 from intermediaries, private traders or on the stock exchange. Sell or donate too. It is also prohibited to use it as collateral for a loan. OFZ can be transferred to other persons only by inheritance. Such strict measures should prevent any abuse of bonds.

Pros of OFZ

— Income from bonds is not taxed

— Estimated reliability of the tool

— Low entry threshold – 30,000 rubles

— Incentivizing individuals to make medium-term savings

— Increasing financial and investment literacy among the population

Disadvantages of OFZ

— There is always a small chance that the government will default on bonds (memory of the events of 1998 does not allow us to fully trust such a financial instrument). On the other hand, the chances that the most reliable bank will collapse are always greater than the probability that the state will declare an internal default.

— Relatively low profitability. Now the average deposit rate is 8%, and, of course, you can find offers from banks with much more attractive conditions. In addition, you can withdraw your deposit with interest at any time without losing profitability, unlike OFZ.

The conclusion suggests itself is that for a financially inexperienced individual, OFZ is a low-risk and reliable instrument with which to start learning to invest. OFZs have simple mechanics and clear predictable returns. However, for experienced investors with large amounts of investment, such a financial instrument is unlikely to be attractive.

What bonds or other types of investments would you like to know about? Submit a request for a blog post.

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How much can you earn

The investor's earnings depend on the timing of the investment, the type of OFZ and the chosen issue. It can vary quite significantly for different papers. When calculating your approximate earnings, you need to consider the following points:

To carry out calculations, it is necessary to take into account the coupon yield. For example, for OFZ-26217 the coupon rate is 7.5% per annum. It is paid every six months.
The price of bonds can be above or below par. You should not focus solely on coupon income when calculating your potential earnings. For example, as of December 12, 2019, the weighted average net price for OFZ-26217 securities is 102.884% of the par value. It does not take into account already accumulated coupon income.
If you plan to use the received coupon income to purchase additional securities (reinvest), then you can calculate the effective yield to maturity. In this case, the assumption is made that new securities will be purchased at the current rate. It is impossible to know their future price. To calculate the effective profitability for the current day, it is convenient to use the calculator on the Moscow Exchange website. It is enough to select the type of bond, indicate the date of purchase and the net price without taking into account the accumulated coupon income. For example, for OFZ-26217 as of December 12, 2019, this figure is 5.75%.
In the calculator you can find out quite a lot of information on profitability. For example, you can find out simple profitability in it. It will be received if you hold the securities until their maturity date and receive the par value along with the payment of the last coupon. For OFZ-26217 as of December 12, 2019, this figure is at the level of 5.5%.

Important. The calculator does not take into account brokerage costs, taxes, etc.

Restrictions

Anyone who has opened a brokerage account with a broker that provides access to the Moscow Exchange can purchase federal loan bonds on the exchange. OFZ-n are available for purchase only to adult citizens of the Russian Federation who have permanent registration in the Russian Federation. You can make transactions on the exchange on any working day from 10.00 to 18.44 while trading is ongoing. According to OFZ-n, the rule is that when buying/selling securities before 16.30 (Moscow time), it will be carried out on the current day, and if the operation is completed after 16.30 (Moscow time), then it will be carried out only on the next business day.

Where to buy federal loan bonds

Today, OFZ-N trading agents are four banks: Sberbank, VTB, Post Bank and Promstroybank. Citizens can purchase these federal loan bonds only from the named credit organizations. The purchase and sale of government bonds between citizens, as well as their trading on the stock exchange, are prohibited. The settlement currency for the transaction is the Russian ruble.

Advantages

The main advantage of investing in OFZs is reliability. The probability of default on these securities is extremely low, and if such a situation happens, then there is no need to talk about the safety of funds on bank deposits. At the same time, OFZs have successfully shown that even under sanctions there will be no problems with them.

Additionally, the following points can be noted as advantages:

Quite easy to purchase, even without contacting a broker.
You can always make money quite quickly and without unnecessary difficulties.
A small amount required for investment (the price of 1 bond is about 1000 rubles, and agent banks for OFZ-n have a minimum investment amount of 10 thousand rubles).

Flaws

All types have only one drawback - low profitability. It is comparable to or slightly higher than bank deposits. This is significantly lower than the possible return on shares. But the risks in the latter case will be much higher. However, if you purchase OFZ on an IIS and receive a tax deduction for the contribution, the profit will be quite good.

Federal bonds are suitable for conservative investors. This tool is extremely reliable. At the same time, they may turn out to be somewhat more profitable than classic bank deposits. But we must take into account that there are many different types and issues of OFZ on the market. You will still have to spend time choosing a portfolio for yourself.

OFZ yield

Since the risks of investing in federal loan bonds are small, their returns are quite modest. For exchange-traded OFZs, it depends on the coupon and current security quotes. Since OFZ-N are prohibited from trading on the secondary market, the yield on them is determined based on the interest rate established by the state.

Securities with these characteristics are ideal for inexperienced investors. They eliminate all risks:

credit – due to a fixed coupon rate;
lack of financial literacy - special knowledge is not required to own OFZ-N;
operational – the investor does not work on the open market and is insured against making erroneous decisions.

To better understand what the yield of federal loan bonds for the population actually depends on, let’s analyze their coupon rates over the last 3 years.

1 issue – up to 10.5% per annum;
2nd issue – from 7.0 to 10.1%;
3rd issue – from 6.0 to 8.6%;
4th issue – from 6.5 to 7.35%.

It is obvious that with each subsequent issue the yield decreases, and in 2020 the interest on OFZ-N will be even lower. This happens because the coupon value depends on the current key rate, and it has been steadily falling in recent years.

As a result, investments in federal loan bonds provide returns comparable to bank deposits. At the same time, OFZ-N do not have the disadvantages of “long” deposits. For example, if the deposit is withdrawn early, the client loses the accumulated interest. Selling part of a package of government bonds does not lead to losses: the bank will buy them back at par.