Profitability of debentures
Debentures have two sources of value: the first is capital gain , and the second is income .
First source of value: capital gain.
Capital gain is the difference in price between what you sold and what you paid. For example, when we buy a property for R$100,000 and after some time we sell it for R$150,000, we can say that R$50,000 is the capital gain. Similarly, debentures are also susceptible to appreciation and for there to be capital gain, it is essential that you have bought for less than you sold.
When we buy a debenture that has gone through a rigorous selection process , we are subject to three sources of capital gain .
Capital gain at discount.
If you buy a debenture at an opportune time, you may be buying it at a discount ( discount ) to its face value. Generally, this occurs at times when the financial market is stressed by some news, such as the outbreak of war between Russia and Ukraine. Therefore, there are few investors willing to buy investments , which causes the bonds to be sold at some discount .
Capital gain with goodwill
The reverse is also valid, if the investor already has the debenture in his portfolio, he may be selling it before maturity, at an opportune moment, and realizing a gain with goodwill . This usually occurs at times when the market is euphoric and consequently investors compete intensely for investments .
I intend not to delve too deeply into this topic now, and I will write in more detail about gains and losses with goodwill and negative goodwill in an upcoming post.
Capital gain with index.
The vast majority of debentures are assigned an index , the most important of which is inflation ( IPCA ). However, nothing prevents the issuing company from indexing its papers to the basic interest rate of the economy ( SELIC ). Technically, the company can index its debentures to any other economic index on the market. Consequently, the debentures aggregate a monetary correction as these indices advance.
Second source of value: Income!
Perhaps what most attracts me to debentures is the yield , for me that is the best part of investing . The debentures pay each period (monthly, half-yearly or annually) an amount, which is deposited in the investor's account. Therefore, if you are thinking of living on income , debentures, when well selected , can be part of your diet as an investor.
I will use again the Vale do Rio Doce debentures, which I used in a previous article, under code VALE29 as an example. If we type this code followed by the word ANBIMA into Google, we will have access to information that interests us as debenture holders. One of the main pieces of information on the ANBIMA website is the title's schedule of events, as it is from there that we can understand how the debenture payment scheme works.
Image 1: VALE29 debenture events schedule - Source: ANBIMA
As we can see, interest on “VALE29” is paid annually on August 15th. Note that the percentage paid per year is fixed at 6.6252% but the amount received by the investor each year is higher. This occurs because this debenture is corrected for inflation . In practice, it is as if the rent on our money were being readjusted automatically year after year.
Capital Gain + Income
Image 2: VALE29 debenture payment scheme
As we can see, debentures have two value components. The first one is the annual income (Coupon) represented by the blue arrow and the second one is the capital gain represented by the green arrow. At the end of the term on 08/15/2020, the investor who carries the paper to maturity will have obtained a total return (estimated) of 11.7% per annum, which I consider a good return on the investment risk.
The trick here is to seek to increase our gains while reducing our risks . As this is something that requires considerable effort, I see many investors joining the “bandwagon” of the moment: seeking a greater gain at a disproportionately greater risk, escape this trap.
Some reflections
- How can you increase returns and reduce risks?
- What would happen if we use the money from coupons to reinvest?