What is a bond and what does you bring as an investment?

Most people know what a share is. There should be greater ignorance in the event of bonds. But especially if the stock exchanges are very restless, these securities can give more security in the investment.

Unlike shares, there is a fixed annual interest payment for bonds and, if you do not sell prematurely, no real losses-regardless of whether US President Donald Trump imposes never for existence against the whole world.

However, the functioning of bonds is a little complicated, and in addition to the amount of the interest rate, further factors must be observed both when buying and selling.

Bonds are so -called fixed -income securities. Anyone who buys them regularly receives interest payments. They can be offered either by states, companies or banks. However, government bonds are far more common. Anyone who buys them lends money to a state for a certain period of time.

The government, which issues the government bond, undertakes to repay this money at a fixed time in the future. In return, the government pays regular interest rates during the term of the bond, which are referred to as the cupon.

So government bonds are bonds that are issued by governments to accept capital. They are a common investment tool for investors and are considered relatively safe – especially in states whose continued existence is not fundamentally questioned.

The most important property of a bond is the amount of the interest rate, which is based on the current market interest. If you keep a bond, you can also resell it. If the interest rates have increased in the meantime, the price can decrease in resale because newly issued bonds would offer higher cupons. Conversely, falling interest rates could increase the value of existing bonds.

Another essential aspect is the duration of the bond, in which a distinction is made between short -term (up to 1 year), medium -term (1 to 10 years) and long -term (over 10 years) bonds. Longer terms usually offer higher interest rates. Here, however, the risk is higher due to potential interest fluctuations and economic changes.

A central factor that must also be observed in the event of government bonds is the creditworthiness of the issuing government. Rating agencies rate the credit rating of countries, which gives investors an indication of how likely it is that a country can repay its debts.

Bonds of countries with high credit rates, such as Germany, are particularly secure, while bonds of countries with lower ratings can be risky and therefore offer higher interest rates.

If you want to buy a government bond, you basically have two options: either you buy it directly from the state or a bank to the so -called emission date, this is the date on which a bond is issued. Or you can buy them on the stock exchange during their term. The difference: The state pays the nominal value, on the stock exchange the spa value of the bond.

Here is an example based on a German government bond (called the federal bond) to make the purchase process more understandable:

How much Maria’s bond is worth at this point depends on the interest rate development. When she bought the bond, both Kupon and market interesters were 2.5 percent. As a reminder: the market interest that is currently valid is the interest rate to which you can invest money on the capital market. It changes depending on the economic development.

With the purchase of her bond 5 years ago, Maria secured the then valid market interest rate of 2.5 percent for the entire term. So Maria can be happy if the interest has dropped in the meantime. Even though everyone else only gets 2 percent interest, it continues to receive 2.5 percent.

This difference directly influences the course value of a bond. If the fixed bond interest (in the example 2.5 percent) is higher than the changing market interest rate, the spa value increases (purchase price of a bond). Anyone who buys Maria’s bond benefits from the higher interest. On the other hand, if the borrower interest rate is lower than the market interest rate, the spa value falls because the interest is below the market level.

How much Maria gets for her bond depends in addition to the market interest on the remaining term. The following applies: the higher the rest of the term, the more interest payments come and the more the difference between bond interest and market interest rate also affects the spa value.

Although government bonds are considered to be relatively safe, they are not without risks. A significant risk is the interest rate risk: if the general interest rates rise, the market value decreases of existing bonds, which can lead to losses if you have to sell the bond before the due date.

Another risk is the credit risk. This is particularly true for countries with weaker creditworthiness, which may not be able to pay interest or repay the nominal value. Inflation risks can also reduce the real return of a bond, as rising prices can reduce the purchasing power of interest payments and repayments.

If investors buy bonds in foreign currency, exchange rate risks should also be considered. A lower exchange rate can reduce the bond return, even if the bond interest is attractive. After all, there is also a liquidity risk: in times of financial uncertainty, it can be difficult to sell a bond at a fair price. Before you invest in government bonds, you should carefully weigh these risks – as with any kind of investment.