Bonds and Depositary Receipts: What They Are and How Investors Use Them

Bonds and depositary receipts are two types of securities available to retail investors. Bonds provide a fixed income through interest payments, while depositary receipts grant access to foreign stocks via local stock exchanges. Both instruments are used for portfolio diversification and risk management.

In this article, we will explain what bonds and depositary receipts are, how they work, their advantages and risks, and how they differ from stocks.

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Part 1: Bonds – What They Are and How They Work

What is a Bond?

A bond is a debt security in which the issuer (a government, corporation, or municipality) agrees to repay the investor (bondholder) the face value of the bond on a specified maturity date, along with periodic interest payments (coupon payments).

Essentially, a bond functions like a loan: the investor lends money to the issuer, who promises to repay it with interest.

Types of Bonds

🔹 Government Bonds – Issued by national governments.

• Considered the safest, as they are backed by the state’s economy.
• Examples: U.S. Treasury Bonds, Russian OFZ, UK Gilts.

🔹 Corporate Bonds – Issued by companies to raise capital.

• Offer higher yields than government bonds but carry a higher risk of default.
• Examples: Tesla, Apple, and Gazprom bonds.

🔹 Municipal Bonds – Issued by cities or regional governments.

• Backed by local government budgets.
• Often provide tax benefits to investors.

🔹 High-Yield (Junk) Bonds – Issued by companies with lower credit ratings.

• Offer high interest rates but come with a significant risk of default.

How Do Investors Earn Money on Bonds?

✅ Interest (Coupon Payments) – Investors receive periodic fixed payments.
✅ Capital Gains – If interest rates decline, older bonds with higher yields increase in value.

Pros and Cons of Bonds

✔ Stable Income – Fixed payments, unlike stock dividends.
✔ Lower Volatility – Bonds are generally less risky than stocks.
✔ Higher Priority in Bankruptcy – Bondholders get paid before stockholders in case of liquidation.

⚠ Lower Returns – Compared to stocks, especially in low-interest-rate environments.
⚠ Inflation Risk – Rising inflation erodes real returns.
⚠ Default Risk – If the issuer fails to repay, bondholders may lose money.

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Part 2: Depositary Receipts (ADR, GDR) – What They Are and Why Investors Use Them

What is a Depositary Receipt?

A Depositary Receipt (ADR – American Depositary Receipt, GDR – Global Depositary Receipt) is a security representing shares in a foreign company, traded on a local stock exchange.

For example, if a Russian investor wants to buy Tesla shares without accessing NASDAQ, they can purchase a depositary receipt issued for Tesla on the Moscow Exchange.

How Do Depositary Receipts Work?

• A financial institution (bank) buys foreign company shares and issues depositary receipts based on them.
• These receipts trade on local stock exchanges like ordinary shares.
• Investors receive dividends just as they would if they owned actual shares.

Types of Depositary Receipts

🔹 ADR (American Depositary Receipt) – Traded on U.S. stock exchanges.
🔹 GDR (Global Depositary Receipt) – Available on international exchanges, mainly in Europe and Asia.

Advantages of Depositary Receipts

✔ Access to Foreign Stocks – Investors can buy shares of international companies via local exchanges.
✔ Portfolio Diversification – Exposure to global markets without opening foreign brokerage accounts.
✔ Dividends and Capital Growth – Holders receive the same dividends as actual shareholders.

Risks of Depositary Receipts

⚠ Currency Risks – The value of the receipt depends on the exchange rate of the issuing country’s currency.
⚠ Corporate Actions – Companies may delist or cancel depositary receipts.
⚠ Regulatory Issues – Some countries impose restrictions on ADR and GDR issuance.

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Comparison of Bonds and Depositary Receipts

Feature	Bonds	Depositary Receipts
Type of Security	Debt Instrument	Equity Representation
Earnings	Fixed interest payments	Dividends and capital appreciation
Risk Level	Low (government bonds), moderate (corporate bonds)	High (same as stocks)
Volatility	Low	High
Foreign Market Access	No (unless investing in foreign bonds)	Yes
Best For…	Stable income, risk reduction	Investing in foreign companies

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Conclusion

Bonds are a stable investment instrument, providing fixed income and reducing overall portfolio risk. They are ideal for investors seeking predictable returns with lower volatility.

Depositary Receipts (ADR, GDR) allow investors to buy foreign stocks through local exchanges, offering exposure to global markets without the need for foreign brokerage accounts. This makes them a convenient tool for international portfolio diversification and access to leading global companies.

 

The choice between these instruments depends on the investor’s goals: bonds are suitable for stable income seekers, while depositary receipts cater to those looking for high-growth opportunities in global markets.