A Bond (from latin obligatio – obligation, liability) is a security issued by a borrower, which obliges the publisher (issuer) to make certain payments to the holder of the bond for a period of time. The bond is a type of security to the creditor, and as such is an income fixed in advance (permanent) in the form of a coupon (interest) and is repaid to the principal at the date of payment, depending on the type of the bond itself.
According to the European law the matter is regulated by numerous Directives. The current legislation establishes the legal framework in laws and regulations. The broader framework is contained in the Commerce Act and special rules are to be found in the Public Offering of Securities act, Mortgage Bonds act, Registered Pledges act, Credit institutions act, etc. The secondary legislation is in decrees of the Council of Ministers, supplementary rules and regulations. The legal framework of the bonds is divided into general and specific.
The general rules are contained in the Commerce Act , in particular in Chapter 14, Art. 204-218.
The specific legislation is to be found in many regulations, but the most significant place among them holds the Public Offering of Securities Act (POSA). POSA concerns not only matters related to the issuance of bonds, but also those in accordance to the offering of bonds on the financial markets, rules of trading, conduct of investors and traders, procedures for monitoring compliance with the rules of sale, penalties for non-compliance and other.
Other laws related to the bonds as securities are:
- Law on settlement of non-performing loans negotiated before December 31, 1991;
- Law on Mortgage Bonds;
- Council of Ministers Decree № 167;
- Law on Protection of deposits;
- Local Self- Government and Local Administration Act;
- Obligations and Contracts Act; Currency Act etc.
Legal nature and meaning
The Bond is a legal connection, validated by the law, whereby the one side – debtor, must perform in link to the other – creditor, a certain counter performance. The contractual relation always exists between two parties - creditor and debtor. Neither in the Bulgarian nor in the European legislation, there is a legal definition of the term "bond". Precisely because of the absence of such a definition, the bond can be viewed in two main aspects:
1) As a loan granted to a Joint Stock Company or a Limited Partnership with Shares;
The main economic meaning embedded in this aspect of the bond is that it is a way of obtaining cash for JSC or LPS. It contains the basic elements of the loan contract: maturity, interest rate, etc. and regulates the right of the lender (bondholder) against the borrower (issuer). The difference between the bondholder and the shareholder is that the bondholder is a creditor of the company. He is not involved in its business activity, does not carry the results of it and his interests have preference before those of the shareholders.
2) as a security;
In the Commerce Act it is not stated explicitly that the bond is a security, but this is implied in art. 204, para. 5, sentence. 2 of the Act, which states that for the issuance, transfer and pledge of physical and dematerialised bonds the rules of shares are applicable. The Commerce Act does not indicate given requisites of bonds, but they can be inferred from Art. 204, para. 5 sentence. 2 of the Commerce Act, applying the provisions of art. 183, para. 1 of the Commerce Act related to the shares, bonds must contain:
- The term "bond";
- Legal information about the issuer, number of issue and serial number of the bond;
- the name of the first holder, in the event that the bond is registered;
- Nominal value of the bond and interest rate or premium;
- Amount, term and conditions of the bond loan;
- Date and place of issue;
- Signature of the person who can bind the company.
Like most securities, bonds also have two prices. The first (which is higher) is the price at which the bond is sold on the stock market by a trader. The second (lower price) is the one at which the dealer buys the bond. The difference between these two prices is called "spread" and represents the profit of the dealer. The bond is a security that materializes two rights - principal claim and the right to the rate (interest) receivable.
Types of bonds
1) Materialised and non materialised - depending on the form of issue;
The right to issue materialised and non materialised bonds is explicitly regulated in the Commerce Act art. 204, para 5. In the event that a company issues non materialised bonds, they are recorded at the Central Depositary.
2) registered and bearer bonds - legitimating holder thereof;
A bond is registered, when the name of the original holder is written on it. Bearer bonds do not contain the name of their holder, which is why he is legitimized by the possession of the bond.
3) Asset - backed bonds and privileged bonds;
The Asset- backed bond materializes two rights: the right to receive at maturity an amount equal to the face value and rate, if there is any. The privileged bond provides additional rights to its holder outside the above two.
4) Corporate bonds and governmental securities - depending on the issuer;
5) Freely transferable and registered bonds with restricted transferability - according to the way of transfer;
"Freely transferable" - there is no restriction on transfer. Registered bonds with restricted transferability bonds are an exception and such can be only registered bonds. Thus, this enables the issuer to exercise control over the individuals acquiring the bonds.
6) Regular bonds and zero-bonds
Regular bonds generate income in the form of a rate. Zero-bonds bring other income according to the rights materialized in the bond. It is possible other rights to be materialized in the bond (eg. privileged bonds) or to be issued as convertible bonds; There are the following possibilities: floating rate bonds - where the rate is not firmly defined and is determined by the inflation or a reference rate of interest; bonds with nominal value and dividend, like the one of shareholders; bonds with nominal value, interest and dividend, which is less than that of the shareholders; bonds with an option of pre- payment.
7) Long-term bonds, medium-term bonds (notes) , short- term bonds (treasury bills) - according to the length of time until maturity.
The Author, Mrs. Veronika Petrova, is a English-speaking accountant in the accounting firm Germania OOD, the accounting firm associated with Law firm Ruskov and Coll. in Sofia.