Bonds: Definition and legal advice
What is the definition of bonds? Bonds are interest-bearing securities through which their issuer borrows money. The interest rate can be fixed, variable or structured.
Topics in our legal advice
Read our information on the topic of bonds below.
Table of contents
- Bonds – Types
- Bond trading
- Bonds: What are the maturities?
- Risks for private investors: Bonds
- Bonds: Risks in detail
- Options for collateralisation
- Bonds lawyer: Legal advice
Bonds – Types
There are different types of bonds. The most important of these are:
- Public bonds – Federal, state and local governments can issue bonds themselves. The Federal Government and the Länder finance their budget deficits with such public bonds. These are usually fixed-interest bearer bonds. Public bonds are, for example, Bundesobligationen, Bundesanleihen and Bundesschatzanweisungen.Recently, bonds issued by countries with a strong credit rating, such as Germany, have offered hardly any returns. Therefore, investment advisors are increasingly recommending emerging market government bonds. However, the higher yields that can be achieved in these cases are generally also associated with significantly greater risks.
- Credit institutions – Credit institutions can also issue bonds. These include Pfandbriefe and public-sector Pfandbriefe, as well as
- Commercial sector – SME bonds, corporate bonds, profit bonds, etc.
Mittelstandsanleihen are particularly important for private investors. They are an alternative form of financing for small and medium-sized enterprises. Companies benefit from the relatively low collateral requirements for SME bonds, whereas for a conventional bank loan, the companies must be able to offer considerable collateral. It is basically a loan that is usually granted to a company by private individuals. Unlike shares, the lender does not receive any shares in the company. The company, on the other hand, is required to pay interest and repay the borrowed amount at maturity.
- International bonds are those that are not issued in the country of the debtor. There are various innovative bond types on the international capital market.
Bonds – Trading
Bonds can be traded on stock exchanges. In most countries, however, financial products can also be traded over the counter. They are usually issued as bearer securities so that they can be traded more easily. This means that the holder of the share is also the creditor. Bonds, however, can also be issued as registered, order or recta securities.
Besides foreign currency loans, bonds in foreign currencies are also very popular with investors – although they are associated with a higher risk for investors.
Bonds – Maturity
Bonds can be agreed for different maturities. Price and medium-term bonds have a term of up to five years. Long-term bonds have a term of more than five years. Government bonds can even have maturities of between ten and thirty years.
Risks for private investors
Private investors are lured by promises of high returns and very often invest in corporate bonds. In recent years, however, practice has shown that even bonds from renowned and supposedly safe companies often result in considerable losses for private investors. Many private investors are not aware of the considerable risks.
Under certain circumstances, even the total loss of their investment is possible. In addition, defaults on repayments and maturity extensions often occur. Affected investors should contact a lawyer they trust at an early stage and have their claims for damages reviewed. In the field of banking and capital market law, liability claims against investment advisors and investment brokers exist in many cases.
Since private investors cannot be expected to have in-depth knowledge of these products, the advice given by bond sellers or bond brokers is crucial. However, investors are very often advised incorrectly or not comprehensively, so that they are then – in the proven case of incorrect advice – entitled to claims for damages. This is legally regulated in investor protection. We, the Herfurtner lawyers, inform you regularly about current warnings in the area of investments.
Bonds – the risks in detail
Bonds, as a subfield of banking law / capital markets law, are associated with various risks. These include in particular:
- Default risk, also called credit risk – the creditworthiness of a debtor is decisive for the default risk of a bond. It is checked and measured by specialised agencies. Debtors with a poor credit rating must offer investors a higher interest rate than debtors with a strong credit rating in order to reward investors’ greater willingness to take risks.
- Currency risk, also known as exchange rate risk, is the risk of changes in exchange rates associated with foreign currency bonds. It is disadvantageous for investors if the nominal currency depreciates against the home currency. Put simply, it means that the currency in which the bond is repaid by the issuer becomes more favourable in relation to the buyer’s home currency.
- Interest rate risk – Changes in market interest rates are significant in that the value of a bond decreases when market interest rates rise. This is particularly relevant if the investor wishes to sell their bond before it matures.
- Inflation risk – the actual value of a bond and future payouts is also significantly affected by the level of inflation.
Bonds – options for collateralisation
There are both secured and unsecured bonds. Government bonds, for example, are not collateralised.
There are the following options for collateralisation:
- Ship Pfandbriefe and aircraft Pfandbriefe are secured by mortgages on ships and aircraft respectively.
- Mortgage Pfandbriefe are secured by land and are subject to the requirements of the Pfandbrief Act.
- Public Pfandbriefe are secured by claims on the public sector and are also subject to the requirements of the Pfandbrief Act.
- Mortgage bonds are secured by collateral on land and are not subject to the requirements under the Pfandbrief Act.
- Asset-backed securities (ABS) are secured by the portfolio of receivables transferred to the special purpose vehicle (SPV).
- In the case of catastrophe bonds, the insurance companies have the option of selling the catastrophe risk on the capital markets and thereby hedging themselves. In this way, the risks arising from natural events can be hedged or limited.
Bonds lawyer: Legal advice
If you have any questions on this topic, our lawyers will be happy to answer them. Bonds lawyer – We advise on all forms of bonds. We also offer expert legal advice on funds, in particular ship funds and swap transactions.
If you have invested in or made payments to one of the companies on this list, our lawyers will be at your disposal at short notice.