A bond, a security for which the investor usually receives interest. With a bond, the investor gives the issuer of the bond a certain amount for a certain period of time. So when you buy a debt security, you are ultimately giving the issuer long-term credit. The purchase makes you a creditor, not a partner. The issuer of the bond, in turn, undertakes to repay the debt to you as the creditor of the monetary claim at the end of the term.
Debt securities can have terms of up to 30 years or more. Depending on the terms and conditions of a bond, both the issuer and the creditor have the right to terminate the investment early. In this way, the issuer of a bond can obtain money without having to take out a loan from a bank or savings bank. The creditor receives an interest-bearing investment. If the issuers of bonds are government agencies, then they are called public bonds. Banks and savings banks issue so-called bank bonds or Pfandbriefe. Industrial companies offer industrial bonds to finance themselves. In recent years, many new forms of bonds have come onto the market: The combination options of several features such as maturity, repayment or interest yields a broad spectrum of differently designed bonds.
Possible goals: When could it make sense for me to invest in a bond?
Fluctuations in the price of bonds are generally less than those of stocks, for example.
The issuers of bonds pay the obligee the interest specified in the terms and conditions on a specific date. At the end of the term, you will usually get the money back.
Debt securities from economically sound companies and states are considered to be a relatively safe investment for long periods of time. If they are traded on the stock market, you can sell them there at any moment. In addition, it is then also possible to achieve a higher return through price gains.
NOTE: Whether an investment in bonds makes sense for you depends on your individual investment goals as well as on your private investment strategy. Because here, too, the following applies: higher returns are only possible with higher risk. There are comparatively safe, but also very risky forms of debt security. The best protection, however, is to obtain comprehensive information and, if necessary, advice before making an investment decision !
What are the risks of investing in bonds?
Price change risk: Price losses are also possible with bonds. Prices can fluctuate significantly depending on the type of bond. If you sell your bond before the end of the term, you have to accept the prices that are then current on the market. Liquidity risk: Some bonds, especially those of small and medium-sized companies, are not or barely liquid . So it can happen that they cannot be sold or not sold at short notice. In this case, you may have to wait until the bond matures to get your money back.
Interest rate risk: With a change in the general market interest rate, the price of a bond also changes. Falling interest rates mean that prices tend to rise. However, if the interest rate rises, the value of a bond can also fall.
Credit risk: The creditworthiness of an issuer can change during the term of a bond. It therefore plays a major role in the price development of a bond. For example, a company can get into financial difficulties or even become insolvent. The debtor may be temporarily or permanently unable to meet its interest and / or repayment obligations on time.
For the creditor of a bond, this means that he can not only lose some or all of his capital, but also that the agreed interest payments will fail. Also keep in mind that, unlike holders of common stock, the investor of a bond as a creditor has no voting or shareholder rights. So you cannot have a say in important company decisions.
Currency risk: You take a currency risk on bonds that are not issued in your currency. This means that exchange rate fluctuations can affect your profit or loss. There is no deposit guarantee for bonds . If the issuer goes bankrupt, you can lose your money.
NOTE: There are comparatively safe and very risky forms of debt security. Find out about the risks associated with debt security before deciding on any particular investment.
How can I benefit from investing in Notes?
The obligee receives the interest payments for the bond, which are specified in the conditions. At the end of the term of a bond, the issuer generally pays back the capital invested to the creditor in full. If the investor decides to sell a bond before the end of the term, this could result in sales profits or sales losses for him. Unlike shareholders, for example, the creditor of a bond is given priority over the owners of the company, but on an equal footing with other creditors if the company becomes insolvent.
What are my obligations and costs when I buy a bond?
As a lender, you have to pay the selling price of the bond as well as the costs of the acquisition. There are, for example, agent fees and distribution charges in which vendors fund their sales expenses.
All costs in connection with the purchase and / or sale of your bond must always be made available to you in advance from your advisor/bank – regardless of whether you are using the bond without advice or with Acquire/ Sell advice.
Can I sell bonds at any time?
Bearer bonds are freely and informally transferable. However, this is more difficult with registered bonds made out to a specific person. It is generally possible to sell listed bonds at current market prices on an exchange. Anyone who sells before the end of the term, however, has to accept the current price on the stock exchange – in a positive as well as a negative sense. A bank or savings bank can, for example, execute the sales order on behalf of the investor on the stock exchange. However, the sale of bonds that are not listed on a stock exchange can be difficult or even impossible.