Bond

A bond can be issued by a company or by a government. The issuer of such a security takes on the role of debtor in order to borrow capital. The buyer of this fixed-income security becomes the creditor and is entitled to repayment of the money lent plus interest. Unlike a share, a corporate bond does not make the buyer a co-owner of the company. Instead, it gives them a securitised claim to repayment, plus interest as payment for providing the capital. In other words, the debtor compensates the creditor with interest, usually in the form of regular coupon payments.

This claim is not a guarantee, however. If the issuer runs into financial difficulties, interest payments and repayment can be delayed, reduced or lost altogether (default risk). That is why issuers with weaker credit quality have to offer higher interest rates than borrowers considered particularly safe.

Bonds can also be bought and sold before they mature, and their prices fluctuate. The most important influence is the general level of interest rates: when market rates rise, the prices of existing bonds with lower coupons fall, and when market rates fall, their prices rise. This is why bond markets react strongly to decisions by central banks and to changes in inflation expectations.

What are Bunds?

Bunds (Bundesanleihen) are government bonds issued by the Federal Republic of Germany. They are fixed-rate securities, typically issued with maturities of around 10 to 30 years, and pay interest once a year. They are generally regarded as low-risk investments and serve as a benchmark for interest rates in the euro area. As exchange-listed securities, they are accessible to everyone and can be traded freely through banks and brokers. Traders often follow and trade Bund price movements via the Euro-Bund future, one of the most liquid interest rate futures in the world.