A bond is a loan that the investor gives to a company or a public body. In Germany, a bond in which only the interest is paid during the term, while the repayment is made in one sum at the end of the term, is referred to as a standard bond because it occurs most frequently. In contrast, the annuity bond, which is also known as the annuity bond, is used more frequently in many countries outside Europe. Of course, an annuity bond is also possible in Germany. It is characteristic of an annuity bond that the repayment is made at the same time as the interest payments during the entire term. In this way, the investor receives predominantly interest in the first years, while in the following years the interest portion decreases in favor of the repayment.
3-10 years maturities for annuity bonds
Maturities of three to ten years are most common for annuity bonds, but longer or shorter term agreements can be made. Depending on the agreement, the annuity bond will be repaid in monthly, quarterly, semi-annual or annual installments. The separation of the repayment amount received into an interest component and a repayment component is only necessary for tax reasons, since the repayment does not, of course, constitute income and the portion attributable to it is therefore not used to calculate the flat-rate tax is taxable. As a rule, an annuity bond is issued for a specific project, which is presented in the sales prospectus. The sales prospectus also contains other valuable information about the issuer and its creditworthiness.
How about the interest rate
When deciding on an annuity bond, this must be taken into account, since there is no protection against a possible loss. This also applies if a bank acts as an issuer, as bonds are not subject to the deposit guarantee fund. There are often offers for annuity bonds from foreign companies on the market that promise very high returns. These offers are generally legitimate, but it is difficult to check the creditworthiness of a foreign company. The annuity bonds issued by a German or a well-known European company do not have excessively high interest rates, but in return they can also be rated as very low-risk.
So that he does not experience an unpleasant surprise, investors should pay attention to another detail in the sales prospectus. Many companies reserve the right to cancel the annuity bond early. In this case, of course, the investor does not lose any money, since the early termination is linked to the obligation to repay the entire remaining amount of the annuity bond. However, an early termination usually only takes place if the company is sure to find cheaper financing options. In this case, interest rates have dropped so much that the investor can no longer receive the same conditions as when subscribing the annuity bond when the repaid money is reinvested.