Tutorial: Czech Government Bonds

What are Government Bonds?

Government bonds are securities giving the owner the right to demand from the issuer the payment of the outstanding amount in nominal value and regular payment of yields (payment of coupons) earned from the bonds on a certain date. Issuers of bonds are individual states which need to finance the state debt. The rate of risk is often measured by rating. Rating sets the rate of risk by which the state will meet its obligations to investors.

How do Government Bonds work?

The interest yield is paid usually once a year on predetermined dates. The nominal value of the bond is also paid on the maturity date together with the final coupon. The price for which bonds are bought is also important for the actual investment yield. At the time when current yields on the bond market are lower than the bond interest yield the bonds are sold for a higher price than their nominal value and vice versa. The current yield to maturity calculated on the basis of the current selling price and yields paid in future is therefore lower or higher than the bond interest yield.

Your benefits

By buying a bond means you will be able to deposit funds for a certain period and for a yield known in advance if you hold the bond until their maturity date.

Your advantages

It is possible to plan further investment thanks to the fixed maturity date.
The current yield to maturity together with the bond selling price is published daily in the bond exchange rate list.

Details you shoud be aware of

The bond selling and buying price changes every day due to changes in yields on the bond market. If an investor holds bonds to the maturity date, price fluctuations do not affect the bond’s final yield.
The settlement of the transfer takes 3 working days since placing the transaction if the investor pays the price of the bought bond.
The yield to maturity is the yield of the bond held to its maturity date. It is based on the bond’s current selling price and future interest yields. The yield to maturity is used to compare the yields of bonds with a different maturity date and coupons of different amounts.
Exit fee for early redemption in case of debt securities, premium bonds, subordinated and other bonds is 2% of the trade volume.
At the time between payments of the interest yield (coupon) the aliquot interest yield (AIY) is calculated as part of the nominal yield pertaining to the bond holder for the period from the issue date or from the date of the last coupon payment calculated to the transaction settlement date. The EIY is automatically added to the bond price and can be positive or negative.
Additional issue of bonds by the Czech Republic is available on the website of the Ministry of Finance of the Czech Republic.

Buing terms

Bonds can be bought for the price according to the current bond exchange rate list.
You need to open an asset account of investment instruments with Česká spořitelna to buy a bond. There is no charge for opening an asset account and this can be done at any branch of Česká spořitelna, an investor needs a valid identity card and a legal entity documents proving the corporate legal personality.
You do not need to have a cash account at Česká spořitelna to buy a bond. Funds for buying a bond can be sent to the relevant collection account from any crown account.
The charge for one bond buying or selling order is CZK 100 regardless of the number of bought or sold bonds.
The minimum investment is usually 3 bonds, i.e. 30,000 crowns.

Who can buy?

A citizen of the Czech Republic or a foreign citizen over 18 years of age (a legal representative for an underage person).
A legal entity, a natural person-entrepreneur.
Other entities established under the laws of the Czech Republic, (foundations, movements, political parties).

How Government Bonds react to…

… increasing interest rates?
The increase of interest rates on the market causes a fall of the price of already issued bonds with a fixed coupon. If the current interest rates are higher than at the time of the issue of the bond, the bond is sold under otherwise the same terms and conditions for a price lower than its nominal value.

… stable interest rates?
Stable interest rates for otherwise the same terms and conditions do not affect the price of the bond.

… decreasing interest rates?
The decrease of interest rates on the market causes a rise of the price of already issued bonds with a fixed coupon. If the current interest rates are lower than at the time of the issue of the bond, the bond is sold under otherwise the same terms for a price higher than its nominal value.

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