Plain Vanilla Bonds

What are the Plain Vanilla BondsPlain Vanilla Bonds are bonds that provide for the payment, on a periodic basis or in a lump sum, the Interest represented by Coupons and the return on capital invested at Maturity. The term Plain Vanilla refers to the basic version of the ice cream in the Anglo-Saxon countries.?

Plain Vanilla bondsPlain Vanilla Bonds are bonds that provide for the payment, on a periodic basis or in a lump sum, the Interest represented by Coupons and the return on capital invested at Maturity. The term Plain Vanilla refers to the basic version of the ice cream in the Anglo-Saxon countries. are debt securities issued by sovereign states, government agencies, supranational entities, listed and non-listed companies that give the holder the right to be repaid, at maturityExpiry or Maturity is the date a financial instrument ceases to exist or matures., with the nominal valueIn the case of a share is the percentage of the capital represented by the share, while for Bonds is the amount on which interest is calculated. of the bond. Additionally, periodic coupons may or may not be paid during the life of the product. They are very simple tools and their name indicates precisely the linearity of their operation. The term 'Plain Vanilla ' refers to the basic version of the ice cream in the Anglo-Saxon countries.

Investment products that offer a remuneration to be payed periodically or at the final maturityExpiry or Maturity is the date a financial instrument ceases to exist or matures. of the instrument, guaranteeing the repayment of the nominal valueIn the case of a share is the percentage of the capital represented by the share, while for Bonds is the amount on which interest is calculated.

ListingThe term Listing means the admission to the stock market of a security or a financial product. and Trading

Plain Vanilla bonds are financial instruments that can be bought and sold both on the MOT market (an electronic bond and government securities market) as well as on the multilateral trading facility EuroTLX of the Italian  Exchange, in the event they are respectively listed and/or admitted to trading on these markets.

Methods and trading hours of MOT and EuroTLXEuroTLX is a multilateral trading facility (MTF) for financial instruments, as specified on the relevant Rule book of the Italian Exchange (such as, for example bonds, certificates and covered warrants). From 1st January 2020, as a result of the merger of EuroTLX SIM S.p.A. into Borsa Italiana S.p.A., the Multilateral Trading Facility EuroTLX® is organized and managed by Borsa Italiana S.p.A.. are specified in the relevant Rule books, available on the website of the Italian Exchange. For example, on both markets,trading in the continuous phase may take place on the open market days between 9am and 5:30pm.

Standard elements

Plain Vanilla bondsPlain Vanilla Bonds are bonds that provide for the payment, on a periodic basis or in a lump sum, the Interest represented by Coupons and the return on capital invested at Maturity. The term Plain Vanilla refers to the basic version of the ice cream in the Anglo-Saxon countries. are characterized by standard elements which are:

• NOMINAL VALUEIn the case of a share is the percentage of the capital represented by the share, while for Bonds is the amount on which interest is calculated.:  The value which will be re-paid on maturityExpiry or Maturity is the date a financial instrument ceases to exist or matures. of the bond;
• COUPONThe right that allows the holder of a certificate representing a title, to collect interest (in the case of bonds) or dividends (in the case of shares), which have matured as well as during the financial year, on shares, administrative and property rights.: Periodic interest the issuerThe issuer is the entity that issues financial instruments in order to raise finance. The most common issuers of financial instruments tend to be: Public and private companies, the State or transnational organizations. pays to the bond holder;
• MATURITYExpiry or Maturity is the date a financial instrument ceases to exist or matures.: The date the bond holder is repaid the nominal valueIn the case of a share is the percentage of the capital represented by the share, while for Bonds is the amount on which interest is calculated. of the bond;
• ISSUERThe issuer is the entity that issues financial instruments in order to raise finance. The most common issuers of financial instruments tend to be: Public and private companies, the State or transnational organizations.: The company or State that issued the debit instrument.

Yield

As with most financial instruments, including Plain Vanilla bondsPlain Vanilla Bonds are bonds that provide for the payment, on a periodic basis or in a lump sum, the Interest represented by Coupons and the return on capital invested at Maturity. The term Plain Vanilla refers to the basic version of the ice cream in the Anglo-Saxon countries., there  are several components that affect the final performanceThe performance of a financial instrument indicates the percentage change in the value of the same in a given time frame. Performance can be expressed both in absolute and relative terms. of the bond.

The book value, the price that is paid during the purchase of the bond, is a determining factor. It is important to take into consideration the amount of couponThe right that allows the holder of a certificate representing a title, to collect interest (in the case of bonds) or dividends (in the case of shares), which have matured as well as during the financial year, on shares, administrative and property rights. payments and whether the interest rateThe interest rate measures the cost of a financing transaction and represents the compensation paid to the bank for the loan of a certain amount of money. It is expressed as a percentage and with reference to the year. is fixed or variable. The bond price and interest rateThe interest rate measures the cost of a financing transaction and represents the compensation paid to the bank for the loan of a certain amount of money. It is expressed as a percentage and with reference to the year. are closely related to another factor in the determination of the level of performanceThe performance of a financial instrument indicates the percentage change in the value of the same in a given time frame. Performance can be expressed both in absolute and relative terms. of Plain Vanilla bond: the credit ratingAn opinion awarded by a specialized independent agency, expressed by an alphanumeric code, which indicates the creditworthiness of a debtor or a particular issue of securities. The Rating is emitted as a result of a detailed analysis of the financial situation of the company being assessed and the overall context in which it operates. Ratings are subject to periodic review. of the issuerThe issuer is the entity that issues financial instruments in order to raise finance. The most common issuers of financial instruments tend to be: Public and private companies, the State or transnational organizations.. The higher the ratingAn opinion awarded by a specialized independent agency, expressed by an alphanumeric code, which indicates the creditworthiness of a debtor or a particular issue of securities. The Rating is emitted as a result of a detailed analysis of the financial situation of the company being assessed and the overall context in which it operates. Ratings are subject to periodic review. (a unit to measure and classify the financial strength of the issuer) the lower the bond yield (in respect of a bond instrument of similar durationThe Duration of a security, measures the change in the price of the same following the change in the level of interest rates and indicates the risk of interest rate tied to the value of a bond. A higher duration number corresponds to high price sensitivity of the security title in order to calculate the rate of return and vice versa. In the case of Zero-Coupon bonds, the duration number is equal to the registered duration number and is always less than the duration number in the case of coupon bearing bonds. and type).

THE ISSUE PRICEThe Issue price is the price at which a share is offered on the Primary Market. It is determined by the Issuer (or the Placement consortium) in the case of placements for the public retail or for transactions reserved for Institutional Investors the price may be determined by an auction.

As regards the price component, a particular bond may be issued at three possible levels:

• At parDefinition which indicates a financial instrument whose market price is equal to the Nominal Value or the Issue Price.: Where the issue priceThe Issue price is the price at which a share is offered on the Primary Market. It is determined by the Issuer (or the Placement consortium) in the case of placements for the public retail or for transactions reserved for Institutional Investors the price may be determined by an auction. coincides with the nominal valueIn the case of a share is the percentage of the capital represented by the share, while for Bonds is the amount on which interest is calculated. repaid at maturityExpiry or Maturity is the date a financial instrument ceases to exist or matures. of the bond (a 100 euroThe Euro is the name chosen by the European Council of Madrid for the European single currency introduced from 1 January 1999. bond at maturityExpiry or Maturity is the date a financial instrument ceases to exist or matures. achieves 100 euro). In this case the price of the bond does not affect either positively or negatively on the overall yield of the bond at maturity;
• Below parA title is quoted as below par as its price (usually the Issue Price or the Redemption Price) is less than its face value.: The issue priceThe Issue price is the price at which a share is offered on the Primary Market. It is determined by the Issuer (or the Placement consortium) in the case of placements for the public retail or for transactions reserved for Institutional Investors the price may be determined by an auction. is less than the nominal valueIn the case of a share is the percentage of the capital represented by the share, while for Bonds is the amount on which interest is calculated. at repayment of the bond. (A bond bought at 98 Euros and at maturityExpiry or Maturity is the date a financial instrument ceases to exist or matures. it is worth 100 euro). For bondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements. that provide the payment of coupons, this price difference is an element that increases the overall returnThe Return on investment is the change in total percentage of the value of a financial instrument at a given time frame. that the investor will receive on maturityExpiry or Maturity is the date a financial instrument ceases to exist or matures. of the investment. For bondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements. that do not provide the periodic payment of coupons, so-called zero coupon bondsZero Coupon Bonds are debt securities that do not pay coupons. The return to the investor is the difference between the redemption value at maturity and the amount paid for the subscription of the bond., the price difference is the overall returnThe Return on investment is the change in total percentage of the value of a financial instrument at a given time frame. that the investor will receive on maturity;
• Above parA title is quoted as above par when its market price is higher than its nominal value.: The issue priceThe Issue price is the price at which a share is offered on the Primary Market. It is determined by the Issuer (or the Placement consortium) in the case of placements for the public retail or for transactions reserved for Institutional Investors the price may be determined by an auction. is higher than the nominal valueIn the case of a share is the percentage of the capital represented by the share, while for Bonds is the amount on which interest is calculated. paid at maturityExpiry or Maturity is the date a financial instrument ceases to exist or matures. to the investor (a bond bought for 102 euroThe Euro is the name chosen by the European Council of Madrid for the European single currency introduced from 1 January 1999. and at maturityExpiry or Maturity is the date a financial instrument ceases to exist or matures. will yield 100 euroThe Euro is the name chosen by the European Council of Madrid for the European single currency introduced from 1 January 1999. to the investor). This higher price negatively affects the overall performanceThe performance of a financial instrument indicates the percentage change in the value of the same in a given time frame. Performance can be expressed both in absolute and relative terms. of the bond.

How they work

In the absence of extraordinary events that would lead to the insolvency of the issuerThe issuer is the entity that issues financial instruments in order to raise finance. The most common issuers of financial instruments tend to be: Public and private companies, the State or transnational organizations. or in the absence of a guarantee of capital repayment, the investor on maturityExpiry or Maturity is the date a financial instrument ceases to exist or matures. receives the bond's nominal face value. During the life of the bond, the investor also receives a returnThe Return on investment is the change in total percentage of the value of a financial instrument at a given time frame. on investment thanks to periodic coupons paid by the bond.

Example of how a fixed rate Plain Vanilla bond works.

Assuming a 3-year, fixed rate bond with a rate of 3%, with annual coupons and issue priceThe Issue price is the price at which a share is offered on the Primary Market. It is determined by the Issuer (or the Placement consortium) in the case of placements for the public retail or for transactions reserved for Institutional Investors the price may be determined by an auction. equal to 100. The cash flow for the investor will be equal to:

Invested capital: 100                             Capital cashed on maturityExpiry or Maturity is the date a financial instrument ceases to exist or matures.: 109

The main types of Plain Vanilla bondsPlain Vanilla Bonds are bonds that provide for the payment, on a periodic basis or in a lump sum, the Interest represented by Coupons and the return on capital invested at Maturity. The term Plain Vanilla refers to the basic version of the ice cream in the Anglo-Saxon countries.

There are different types of Plain Vanilla bondsPlain Vanilla Bonds are bonds that provide for the payment, on a periodic basis or in a lump sum, the Interest represented by Coupons and the return on capital invested at Maturity. The term Plain Vanilla refers to the basic version of the ice cream in the Anglo-Saxon countries. that allow the investor to undertake transactions which are more in line with his expectations of risk/return.

Fixed rate bondsFixed interest rate bonds are debt securities in which the return to the investor is via periodic fixed rate Coupons which are identical for the duration of the title.

The fixed rate bond is the simplest bond available on the market. The investor is able to define from the time of purchase of the bond, the level of couponThe right that allows the holder of a certificate representing a title, to collect interest (in the case of bonds) or dividends (in the case of shares), which have matured as well as during the financial year, on shares, administrative and property rights. payment received from holding the bond due to the fixingThe process of "fixing" official prices for different asset classes, including commodities and currencies. of a predetermined interest rateThe interest rate measures the cost of a financing transaction and represents the compensation paid to the bank for the loan of a certain amount of money. It is expressed as a percentage and with reference to the year. for the durationThe Duration of a security, measures the change in the price of the same following the change in the level of interest rates and indicates the risk of interest rate tied to the value of a bond. A higher duration number corresponds to high price sensitivity of the security title in order to calculate the rate of return and vice versa. In the case of Zero-Coupon bonds, the duration number is equal to the registered duration number and is always less than the duration number in the case of coupon bearing bonds. of the loan.

The fixed rate bondsFixed interest rate bonds are debt securities in which the return to the investor is via periodic fixed rate Coupons which are identical for the duration of the title., however, have an element for potential negativity: the responsiveness of their prices to changes in the cost of money. In particular, an increase in interest rates leads to a loss in the market value of the bond, causing, in the event of sale, the capital lossThe Capital loss represents the negative balance (Loss) of the sale price (or Repayment) of a title and the purchase price (or subscription) of a real or financial asset. to the bondholder.

Variable rate bondsVariable interest rate bonds are debt securities in which the return to the investor is represented by periodic coupons calculated at a rate of interest which may change during the life of the loan. The interest rate may be: predetermined or indexed to a benchmark to which a spread is usually added.

The variable-rate bondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements. are bondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements. with a predetermined couponThe right that allows the holder of a certificate representing a title, to collect interest (in the case of bonds) or dividends (in the case of shares), which have matured as well as during the financial year, on shares, administrative and property rights. structure (coupons paid quarterly, six monthly, annually, etc…). However the recognised rate value of the periodic couponThe right that allows the holder of a certificate representing a title, to collect interest (in the case of bonds) or dividends (in the case of shares), which have matured as well as during the financial year, on shares, administrative and property rights. changes over time and does not remain constant throughout the life of the bond as in the case of fixed rate bond.

Typically, the bond couponThe right that allows the holder of a certificate representing a title, to collect interest (in the case of bonds) or dividends (in the case of shares), which have matured as well as during the financial year, on shares, administrative and property rights. is determined by adding an excess returnThe Return on investment is the change in total percentage of the value of a financial instrument at a given time frame. to a market rate such as LiborAn acronym for London Interbank Bid Rate. The short term (3 to 6 months) Interest rate on the London interbank market represents the rate at which banks are willing to lend to each other. It is a variable rate and is often used as a Benchmark for financial operations. or EuriborThe Euribor is the Euro interbank offered rate. The Euribor is the rate of short-term interest calculated daily and paid on interbank deposits in Euro. With a base set at 31 December 1998, the Euribor is calculated on transactions having maturities ranging from one week to one year.. The excess returnThe Return on investment is the change in total percentage of the value of a financial instrument at a given time frame. is given by the spreadRepresents the difference between two prices of the same title, or between two interest rates., i.e. the interest rateThe interest rate measures the cost of a financing transaction and represents the compensation paid to the bank for the loan of a certain amount of money. It is expressed as a percentage and with reference to the year. added to the market rate that the issuerThe issuer is the entity that issues financial instruments in order to raise finance. The most common issuers of financial instruments tend to be: Public and private companies, the State or transnational organizations. pays the bondholder.

Step Down and Step Up BondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements.

Step Up and Step Down bondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements. are a particular category of Plain Vanilla bondsPlain Vanilla Bonds are bonds that provide for the payment, on a periodic basis or in a lump sum, the Interest represented by Coupons and the return on capital invested at Maturity. The term Plain Vanilla refers to the basic version of the ice cream in the Anglo-Saxon countries..  They are a mix between fixed-rate and floating rate bondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements.. Specifically, Step Down bondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements. are bondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements. with coupons decreasing over time, the Step Up bondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements. are bondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements. where the couponThe right that allows the holder of a certificate representing a title, to collect interest (in the case of bonds) or dividends (in the case of shares), which have matured as well as during the financial year, on shares, administrative and property rights. rate rises during the life of the bond.

Zero-CouponThe right that allows the holder of a certificate representing a title, to collect interest (in the case of bonds) or dividends (in the case of shares), which have matured as well as during the financial year, on shares, administrative and property rights. BondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements.

Unlike fixed rate or variable rate bondsVariable interest rate bonds are debt securities in which the return to the investor is represented by periodic coupons calculated at a rate of interest which may change during the life of the loan. The interest rate may be: predetermined or indexed to a benchmark to which a spread is usually added., zero-couponThe right that allows the holder of a certificate representing a title, to collect interest (in the case of bonds) or dividends (in the case of shares), which have matured as well as during the financial year, on shares, administrative and property rights. bondsThe Bonds are debt instruments representing a portion of debt issued by a company or by a public body to finance part of its financial requirements., also known by the acronym ZCB, do not pay interest in the form of coupons. The remuneration for the investor is only the difference between the redemption priceAmount paid to the holder of a financial asset at maturity. and the purchase price of the security. This is why it is said that the performanceThe performance of a financial instrument indicates the percentage change in the value of the same in a given time frame. Performance can be expressed both in absolute and relative terms. is "implicit" because it is embedded in the difference between the two prices.