Latest on Bonds and Fixed-Income Securities

As of January 2025, the average yield on ten-year German government bonds was 2.22% per year. German government bonds are considered a relatively low-risk investment. To achieve higher returns from individual bonds, investors must accept higher risks in bond trading. However, bonds issued by entities with low credit ratings carry a significantly higher risk of potential loss. As an alternative to government bonds, fixed-term deposits can be an attractive investment option, offering deposit insurance and the potential for higher returns.

Invest in fixed-term deposits now

Definition: What Are Bonds and How Do They Work?

Bonds are exchange-traded securities that typically offer fixed interest payments and repay the invested capital at the end of a set term. They are also commonly referred to as "fixed-income securities," "debentures," or "notes."

Simply put, a bond represents a loan granted to the issuer. In return, the issuer agrees to pay regular interest (coupon payments) throughout the life of the bond and repay the nominal value at maturity.

Typical features of bonds include fixed interest rates and fixed terms. Issuers can be banks, institutions, corporations, or governments. Investors may be individuals or institutions. Bonds are assessed based on creditworthiness and categorized by rating agencies, ranging from AAA (highest quality) to D (default).

Example: Bond Yield

In a fictional example, an investor purchases ten bonds with a face value of €100 each and an annual interest rate of 3.00%. The term is ten years. The investor receives annual interest payments totaling €30, and at maturity, the initial investment of €1,000 is repaid in full.

Definition: What Are Bonds and How Do They Work?

Bonds are exchange-traded securities that typically offer fixed interest payments and repay the invested capital at the end of a set term. They are also commonly referred to as "fixed-income securities," "debentures," or "notes."

Simply put, a bond represents a loan granted to the issuer. In return, the issuer agrees to pay regular interest (coupon payments) throughout the life of the bond and repay the nominal value at maturity.

Typical features of bonds include fixed interest rates and fixed terms. Issuers can be banks, institutions, corporations, or governments. Investors may be individuals or institutions. Bonds are assessed based on creditworthiness and categorized by rating agencies, ranging from AAA (highest quality) to D (default).

Example: Bond Yield

In a fictional example, an investor purchases ten bonds with a face value of €100 each and an annual interest rate of 3.00%. The term is ten years. The investor receives annual interest payments totaling €30, and at maturity, the initial investment of €1,000 is repaid in full.

Bond Basics: Key Terms You Should Know

When researching bonds, you may encounter several technical terms. The following explains the most important concepts:

What Types of Bonds Are There?

Bonds are categorized based on their interest structure, the type of issuer, or other characteristics such as their structure. By interest type, they include classic fixed-rate bonds, zero-coupon bonds, variable interest bonds, and low-yield bonds. Issuer-based categories include government bonds and corporate bonds. Bonds also differ by credit rating, sector, and the issuer’s country. Other classifications include foreign currency bonds, profit participation rights, subordinated bonds, convertible bonds, and structured bonds.

Government Bonds

Government bonds are issued by sovereign states like Germany. Their terms can range from a few months to over 30 years. Bonds from financially strong countries are considered relatively low-risk investments compared to other bond types.

Corporate Bonds

Corporate bonds are issued by companies to raise capital. The yield depends on the company’s credit rating and bond term. Typically, the shorter the term and the stronger the company, the lower the interest payments tend to be.

Convertible Bonds

Convertible bonds are hybrid instruments that combine features of bonds and stocks. They can be converted into shares at a predetermined price. Depending on their structure, they may behave more like bonds or like stocks.

Covered Bonds (Pfandbriefe)

Covered bonds are corporate bonds secured by specific assets, such as mortgage loans. Due to their backing, they generally offer lower interest rates. In case of default, these bonds are protected by the pledged collateral.

Subordinated Bonds

Subordinated bonds are mostly issued by banks or insurance companies. In the event of insolvency, investors are paid only after all other creditors. Due to this higher risk, these bonds often offer higher returns.

High-Yield Bonds

High-yield bonds are issued by entities with lower credit ratings — typically rated BB or lower by rating agencies. These government and corporate bonds offer higher return potential but come with significantly increased risk.

Can a Bond Be Sold Before Maturity?

Bonds can be sold before their maturity date. This can be attractive if the bond price has increased, allowing potential profits or early access to invested funds. Bond prices work similarly to stocks, mutual funds, or ETFs. Despite fixed interest payments and repayment of the nominal value at maturity, bond prices fluctuate based on the issuer’s credit rating. Bond prices are quoted as a percentage of face value, not in euros or dollars. As maturity approaches, the price typically converges to the nominal value since repayment is imminent.

Example:

If a bond with a nominal value of €100 falls to 93% and is sold, it yields €93. If the price rises to 105% and is sold, it returns €105, generating a €5 profit.

What Risks Are Associated with Bonds?

All bonds carry risk, which varies depending on the bond type. Risk is assessed based on the issuer’s creditworthiness. Companies with poor credit ratings present greater risks than those with strong ratings. The higher the risk (i.e., the lower the credit rating), the higher the interest rate offered.

Example: Risks of Corporate and Government Bonds

Bonds from the Federal Republic of Germany offer relatively low yields because a default is considered highly unlikely. In contrast, bonds from emerging or developing countries carry a higher default risk, which is compensated by higher yields. The same principle applies to corporate bonds. Mid-sized company bonds tend to offer higher returns due to higher risk, whereas large industrial or corporate bonds offer lower yields. Convertible and subordinated bonds also vary in risk depending on the issuer's credit rating.

Bonds at a Glance: Advantages and Disadvantages

As an investment, bonds offer both advantages and disadvantages. Here's an overview of the key pros and cons:

Investing in Bonds – How and Where Are Bonds Traded?

Bonds are traded directly through banks or on the stock exchange. To invest in bonds, an investment account (securities depot) is required. Transaction fees apply when trading bonds. In addition to individual bonds, investors can also purchase bond funds, also known as fixed-income funds. These funds invest in multiple bonds, helping to spread and reduce risk.

Allianz Asset Management as an Alternative to Bonds

A cost-effective alternative to actively managed bond funds are passively managed bond ETFs that track the performance of a bond index. Allianz’s asset management does not purchase individual bonds, but instead invests in a globally diversified index fund containing a wide range of bonds.

Sign In