What Are Financial Bonds?

Definition of Financial Bonds

In corporate securities, securities issued by banks and non-bank financial institutions are generally referred to as financial securities. In Western countries such as Europe and the U.S., financial institutions that can issue securities are typically joint-stock companies, so securities issued by financial institutions are classified as corporate securities.

However, in China and Japan, bonds issued by financial institutions are specifically defined as financial bonds, highlighting the role of financial institutions as issuers in the securities market. However, stocks issued by joint-stock financial institutions are not classified as financial securities but rather as ordinary corporate stocks. Therefore, the primary method of direct financing by financial institutions discussed here is financial bonds.

Characteristics of Financial Bonds:

As a special type of bond, financial bonds have the following features:

1. Financial bonds represent a creditor-debtor relationship between financial institutions (such as banks) and bondholders.

2. Financial bonds are generally bearer instruments, non-registerable, and non-replaceable if lost, but they can be pledged or transferred.

3. In China, financial bonds are primarily issued to individuals, and the interest income is exempt from personal income tax and personal income adjustment tax.

4. Interest on financial bonds does not compound, cannot be withdrawn in advance, and no overdue interest is accrued in case of delayed redemption.

5. Financial bonds offer fixed interest rates, which are generally higher than the rates on savings deposits for the same period.

6. Funds raised through financial bonds in China are usually earmarked for specific purposes. For example, the investment bonds once issued by China Construction Bank were mainly used to finance large and medium-sized national construction projects.