What are bonds and how can they help you build wealth?
Bonds are special securities that are usually characterized by fixed interest payments.
There are very safe bonds, but also highly risky ones
They are issued by governments and companies that use them to raise money on the capital markets.
When interest rates rise, bond prices fall, and when interest rates fall, bond prices rise.
Bonds are also known as debentures or debenture stock, which are mostly fixed-interest securities with a fixed term. They are therefore securities that pay out interest regularly over a predefined period of time. Bonds serve as a means of financing for companies or governments: That is, a company, bank or government borrows money on the capital market for a specified period of time. A bond confirms to the buyer a right to repayment of the money paid at the end of the period (redemption) as well as regular interest. They are often traded on the stock exchange. But: Bonds do not necessarily have to be traded on stock exchanges, as there is no obligation to do so.
According to Deutsche Börse, there are around 16,000 shares tradable on German stock exchanges, but 29,000 bonds. Private investors also invest in bonds, as they are basically suitable as a relatively safe investment for longer periods. The volatility of bonds is on average lower than the volatility of stocks. Investors can resell bonds that are traded on the stock exchange. For the portfolio, bonds are therefore suitable primarily as a risk-reducing component.
At first glance, you might think bonds are complicated securities. However, if you understand the most important terms, bonds are easy to understand.
The yield is the most important key figure is the expected annual return, which results from the term, the fixed interest payments, the purchase price and the repurchase price of the bond. The yield is expressed as a percentage. In the case of bonds, the yield is influenced by various factors, such as interest rate levels, central bank decisions, the general market environment and much more.
The present value is the sum of the present values of all interest payments and the present value of the repayment of the nominal value at the end of the term.
The par value (nominal value) is the amount of the claim, i.e., the amount of money noted on the bond. It forms the basis of the interest payment.
The coupon (also coupon) indicates the interest rate in percent. It always refers to the nominal value of a bond and is therefore also called the nominal interest rate. The amount of interest depends on the creditworthiness of the issuer. An exception to this is the zero coupon bond, where there are no ongoing interest payments.
The term is the fixed period over which a bond is issued. At the end of the term, the issuer must repay the capital invested. With redemption bonds, on the other hand, the capital is paid in installments during the term.
There are two ways for companies to raise capital: One is to sell shares by issuing stock or to issue bonds. Shareholders thus participate in the company's equity. The buyers of a bond, in turn, are thus lenders and provide the company with outside capital. Bond subscribers profit from the interest. Shareholders, in turn, benefit from the success of a company through the dividend distribution.
- Only stock corporations can sell shares.
- Shareholders are (co-)owners and have a say in the company.
- Shares can be sold at any time.
- The value of a share depends in part on how successful a company is.
- Bonds can be issued by all types of companies.
- Bondholders are creditors and have no say in the matter.
- Bonds have fixed maturities. Their sale is not readily possible, except on the stock exchange.
- Bonds precisely determine the time of repayment and the amount of interest
Government bonds are issued by states. In addition, there are so-called public bonds issued by local authorities, for example the state of Hesse.
The federal bond is the government bond for Germany. It is used to finance the German state.
Corporate bonds are issued by German or international companies.
Mortage bonds are bonds issued by Pfandbrief banks, also mortgage banks. They are backed by real estate and ship mortgages or land charges, among other things.
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