Characteristics of bonds

A bond is a fixed income instrument that represents a loan made by investors to a borrowers. Banks, companies or the public sector issue them and thus procure debt capital for a certain period of time. Those who buy bonds regularly receive interest and at the end of the bond's term the money invested is returned. About 27,000 bonds are traded. 

Bonds give you the right to repay the loan at a certain point in time plus interest. Investors who purchase bonds take a creditor position. They have a claim against the issuer. Bonds have different features - such as maturity, interest payment or type of interest rate. These features are defined in the terms and conditions of the issue.

• The nominal value is the amount of money noted on the bond. It indicates the amount of the monetary claim and forms the basis for the interest rate.
   
• The coupon indicates the amount of interest, usually as a percentage of the nominal value per year. The term coupon comes from the time when bonds were effectively made of paper. They were accompanied by a sheet with coupons for the entire term. In return for the coupons, investors at a bank were paid the interest.
   
• Interest is paid annually, semi-annually, quarterly or monthly. In Germany annual interest payments are usual.
   
• The term is the period during which the invested capital must be repaid. In contrast to shares, bonds usually have a fixed term, at the end of which they are redeemed at par value. Bonds can be sold on the stock exchange, for example, before this date. However, there are also very long-dated bonds, e.g. 100 years or a few endless bonds called perpetual annuities.
   
• Bonds are usually redeemed at the end of their term. However, there are also bonds with instalment or annuity repayments. In the case of a bond with repayment by instalments, the debtor pays the same annual repayment instalments until the loan has been repaid in full. In the case of a bond with annuity repayment, the debtor pays a constant amount consisting of a repayment and interest payment until the loan has been repaid in full. Over time, the repayment portion increases, as the interest only has to be paid on the declining residual debt.
   
• The issue price: Bonds can be issued at nominal value (at par), below nominal value (below par) or above nominal value (above par). The issue price is closer to the nominal value the more the bond interest rate corresponds to the current market interest rate. This issue price is usually expressed as a percentage. The nominal value - par - then corresponds to 100 percent, below par is below, above par correspondingly above.
   
• Bond price: Bonds are traded on the stock exchange. The price of a bond is determined by supply and demand. It can be above or below the nominal value. Almost all bonds are quoted as a percentage of their nominal value.

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