Bonds

Investment Instruments

Bonds (also called fixed-interest securities, debenture, or debt obligation) are issued by credit institutions, governments or corporations. They serve as long-term credit financing for the issuer.

Bonds securitize the right to repayment, with interest, of the borrowed amount at a specific date. Investors who buy bonds become creditors and have a claim against the issuer. Bonds have various characteristics such as a maturity, interest payment or type of interest calculation. These characteristics are set out in the issuing conditions.

Key features

• Nominal value/ par value
  The nominal/ par value is the amount noted on the bond. It indicates the amount of the monetary claim and is used as the basis for calculating interest.
• Interest/ yield
  Interest can be paid annually, semiannually, quarterly or monthly. In Germany, interest is typically paid on an annual basis.
• Maturity
  The maturity is the time period in which the invested capital must be repaid. Unlike with stocks, bonds have a fixed maturity. When a bond matures, the bond is paid back at its par value. Before that time, the bond can, for example, be sold on the exchange.
• Redemption
  Typically, bonds are redeemed when they mature. There are, though, bonds with installment or annuity redemptions. The holder of a bond with installment redemption gets equal payments each year until the debt is repaid. For bonds with annuity redemption, the holder gets an equal payment that consists of the redemption and interest payment until the bond is repaid in full. Over time, the redemption portion increases since the interest is calculated against the remaining debt.
• Issue price
  Bonds can be issued at par value, under par or over par. The issuing price is closer to the par value when the bond’s interest is closer to the current market interest rate.
• Bond price
  Bonds are traded on the exchange. The price is derived from supply and demand, and can be above or below the par value.