Basic Characteristics of Bonds and their Dynamics on the Croatian Secondary Market

Abstract

In light of recent announcements of the Ministry of Finance about the emission of the so-called national bonds, this paper deals with the problems related to bonds as the most widely accepted financial instrument on the Croatian secondary market. Although the meaning of the bond as a debt security financial instrument is probably clear to everyone, trading and utilization of all the advantage this financial instrument offers is still insufficiently developed. Moreover, since bonds appear to be a possible alternative to bank deposits, it is necessary to determine the basic concepts of the difference in the calculation of yield between these two potential investments. Considering these facts, the contribution of this paper is aimed at taking a closer look and simplifying the overall understanding of this significant financial instrument. On top of that, the purpose of this paper is to raise the awareness of the broader public with respect to understanding of the basic characteristics of bonds, their advantages and disadvantages and ultimately to elaborate in detail the investment possibilities offered by bonds, as one of the most popular debt security financial instrument in Croatia. The first chapter describes the general problems related to bonds, their basic characteristics and current divisions. The paper then elaborates current dynamics of bonds in the secondary capital market in the Republic of Croatia, providing a comparative presentation of purchase and sale trade channels in the secondary market. The final chapter shows a practical example of price and yield calculation until maturity of the bond issued by the Ministry of Finance of RoC, being traded on Zagreb Stock Exchange.

Keywords: Bonds, yield to maturity, risk, bond price

JEL Classification: G23, G24, G31