Interest: I am purchasing a bond.

I am purchasing a bond – page 1.

If companies wanted to borrow money outside of banks in the early 2000s, they took some strange paths. For example, the food manufacturer Schneekoppe advertised its bonds on the back of its cereal boxes. If someone wanted to lend the company 5,000 euros over a fixed period of time with interest, they had to cut out the corresponding snippet from the box, fill it out, and mail it. After transferring the 5,000 euros, they would receive a bond by mail and become a private lender to Schneekoppe.

Today, it is much easier to purchase a bond. One can simply place it in their portfolio through a broker or a bank. And although investors acquire shares of a company with stocks and provide companies and governments with an interest-bearing loan with bonds, the actual purchasing process is similar. Unlike stocks, however, bonds can be a relatively secure component of a portfolio, especially during stressful times. Stock trading can be hectic as it depends on how the market develops. And the market is often unpredictable and uncertain. On the other hand, bonds are independent of market fluctuations. They are therefore a predictable source of income, which is reassuring in uncertain times. The following rule of thumb helps interested individuals with their purchase.

Step 1: Understanding how interest rates affect bonds

In a survey conducted by the Austrian Erste Bank, less than ten percent of the respondents knew what a bond is. Therefore, it is advisable to first familiarize oneself with and understand the impact of interest rates on bonds. This advice comes from Matthias Schober, former investment banker and founder of the YouTube channel „Vermögensfabrik“. When purchasing a bond, one is essentially lending money to a company or a government. The recipient agrees to repay the money after a specified period of time and pay a fixed interest rate, also known as a coupon, for the duration of the bond.

The higher the interest rate, the greater the initial return on the bond. And because interest rates are currently rising – for example, the interest rate on the ten-year German government bond is currently 2.7 percent instead of 1.54 percent last year – more and more private investors are buying bonds. In the first quarter of this year alone, investments in bonds reached a record high of 110 billion euros. However, this trend could soon reverse.

Because the yield of a bond is not only determined by the agreed interest rate, but also by its price. The price increases when interest rates decrease, making it the best time to buy a bond. In times of rising interest rates, shorter maturities are recommended as new bonds with higher interest rates are likely to be introduced. Longer maturities make sense when interest rates fall, as it is likely that new bonds in the future will offer lower interest rates. The face value is the amount at which a bond is issued, and the interest is calculated based on this value. If the price of the bond falls below its face value, it may be worth buying: selling it at a higher value before the maturity date can result in profit. Conversely, it can result in a loss. However, if one intends to hold the bonds until the end of the maturity period, they do not need to consider such price fluctuations, but they also do not have access to the money until then.

Step 2: Establishing a budget and timeline

Unlike stocks, bonds offer a predictable investment that is repaid on a fixed date. These credit securities always have a specific duration, ranging theoretically from two to 100 years. So, if someone knows today that they want to take a world trip or make a down payment on a property in five years, they could consider a five-year bond. The interest is guaranteed, as it is paid out annually, and the invested amount is returned after five years. However, this is assuming that the bond does not default due to the company going bankrupt.

Den besten Zeitpunkt finden, um eine Anleihe zu kaufen

If someone wants to invest for a long period of time, such as for retirement planning, they should choose stocks. „The average return on stocks is higher than on bonds if you can wait for more than ten years,“ says Peter Thilo Hasler, analyst and author of the book „Everything You Need to Know About Bonds.“

If you want to minimize risks when buying bonds, it is advisable to invest only from a certain amount. Just like with stocks, diversification is important for bonds, according to Schober, and it is meaningful to do so starting from approximately 15,000 euros. Most bonds are available from 1,000 euros, and according to the expert, it is recommended to have at least 15 bonds from different industries. It is important to note that regional diversification is not unlimited. Unlike stocks, bonds have a direct currency risk. If a German individual owns a US government bond in US dollars and the dollar were to decline compared to the euro, the currency loss would directly affect the bond.

Step 3: Select a bond.

Vermögensberater Schober würde vorrangig in Unternehmensanleihen statt in Staatsanleihen investieren. „Denn wenn man nicht gerade eine Anleihe von Argentinien kaufen will, sind Staatsanleihen so sicher wie Tagesgeld“, sagt er. Der Zins ist entsprechend nicht viel höher als auf Konten bei der Bank, der Aufwand lohnt sich laut dem Vermögensexperten daher nicht. Unternehmensanleihen sind seiner Ansicht nach lukrativer. Schober empfiehlt Anfängern, auf bekannte Namen zu setzen. Die fünfjährige Porsche-Anleihe etwa bietet aktuell 4,5 Prozent Zinsen, die von TUI Cruises 6,5 Prozent und die des Industriekonzerns Hörmann sogar sieben Prozent. Fürs eigene Wohlbefinden sollten Anleger sich das Unternehmen genauer anschauen und die Branche kennen. Wer alle Anleihen auf einen Blick haben und nach bestimmten Kriterien filtern möchte, kann dafür den Anleihefinder der Börse Stuttgart nutzen. 

Bonds are safer than stocks because they are paid first in case a company goes bankrupt. „When a company becomes insolvent, the creditors, including bondholders, are always paid first before the shareholders,“ Schober says. However, there is no guarantee that bondholders will be paid. The default risk of a bond can be assessed based on the interest rate. „One can assume that the higher the interest rate, the greater the risk,“ Schober says.

Er und Hasler empfehlen, sich an Ratings zu orientieren, die anzeigen, wie wahrscheinlich es ist, dass eine Anleihe ausfällt. Ratingagenturen wie Moodys oder Standard & Poor’s bewerten Anleihen von AAA (geringste Ausfallwahrscheinlichkeit) bis C (sehr hohe Ausfallwahrscheinlichkeit). Das Rating D bedeutet tatsächlichen Ausfall. Schober empfiehlt, niemals unter einem Rating von BBB zu investieren. Laut Ratingagenturen beträgt die Ausfallwahrscheinlichkeit im ersten Jahr dann 0,3 Prozent, was Schober als sehr gering ansieht.

Once you have chosen a specific corporate bond, you just need to select the appropriate version of that bond. „For beginners in bond investing, it is advisable to always buy so-called plain vanilla bonds,“ says Schober. This is essentially the basic version of a bond. In addition to that, there are various other options such as convertible or zero-coupon bonds. The former allows buyers to convert their bonds into stocks, while the latter pays out interest at the end of the term instead of annually. According to the bond expert, first-time bond buyers can safely ignore both of these options.

Step 4: Finding a broker and the appropriate market, placing an order.

Bonds, like stocks, have a security identification number (WKN) or an International Securities Identification Number (ISIN). It is best to note down this number and then search for the bond with the corresponding broker. „Most major banks usually offer a good selection of different bonds, but some newer brokers are also increasingly including bonds in their offerings,“ says Schober. Most brokers charge the same fees for trading bonds as they do for stocks or other securities. Those who choose to use a direct bank such as ING or Comdirect, or a neobroker, may potentially save some money. Typically, there are flat rates of five to ten euros per order, and a certain number of orders are often free. On the other hand, it is more expensive at a branch bank like Commerzbank, but you can receive in-person advice.

If you have chosen to invest in a bond and have set up a depot or broker, the final step is to select the marketplace and place the order. Bonds can be traded on all twelve German stock exchanges, such as Xetra, the Frankfurt Stock Exchange, or Tradegate, as well as off-exchange through OTC (over the counter) brokers. Trading can also take place outside of exchange hours at these OTC brokers, but there is a higher risk for investors as there is no stock market supervision. The fees, known as exchange fees, vary depending on the marketplace chosen. On the order, you can also specify the maximum price at which you would be willing to buy the bond.

Für Fortgeschrittene: Die Anleihe wieder verkaufen

Was man kauft, kann man in aller Regel wieder verkaufen, sofern man Abnehmer findet. Das gilt auch für Anleihen. Insofern muss sie niemand bis zum Ende ihrer Laufzeit halten. Der Verkauf kann sich lohnen, vor allem, wenn die Zinsen sinken. Dann werden bereits emittierte Anleihen im Vergleich zu neuen wertvoller. Aktuell erhalten Anleger auf Anleihen gute Zinsen, dafür performen die Kurse eher schlecht. „In den vergangenen fünf Jahren war es genau andersherum. Da bekam man zwar keine Zinsen, durfte sich aber über hohe Kursgewinne freuen“, sagt der Analyst Hasler.

However, these higher profits are not without risk. They are only available if one sells them at the right time. Those who plan to sell a bond before its maturity and speculate on price gains take on a higher risk compared to simply holding the bond.

If someone wants to sell in advance, they must regularly monitor the development of the price. And in the second step, wait for the right time. Finding it is not always easy, but in principle, „bond prices rise as soon as interest rates fall again,“ says Hendrik Buhrs from Finanztip. However, when this will happen next is still uncertain. According to Hasler, one should also be cautious about interest rate forecasts. „Many expect interest rates to fall again at the end of this year or next year,“ he says. However, whether this will actually happen is not known for certain.