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Tutorial: Senior bonds

What are bank debentures?

Bank debentures are fixed- or floating-rate securities issued by banks, savings banks, and other credit institutions in order to finance their lending business. The maturities of the bonds are largely medium- to long-term. The dividend (coupon) is mainly paid once a year.
The issuing institute is liable with all its assets for the timely honouring of the interest payments and the redemption. In addition, the claims arising from bank debentures are deemed direct, unconditional, and non-subordinated, i.e. they have senior debt status. In the case of insolvency you, the holder, take priority in having your claims satisfied before all other creditors. When buying bank debentures, you should pay attention to the rating of the issuing credit institution.

How do bank debentures work?

The investor buys the bank debenture at its issue price. In return, the investor receives periodical interest payments (coupons) and the redemption at the end of maturity. The coupon can be fixed or variable. At the end of maturity the bank debenture is redeemed in full, i.e. paid back, or in the case of a redemption plan, paid back in instalments.

Your benefits

A bank debenture is ideal for you if you want to invest your money with a medium- to long-term horizon. You receive attractive interest rate payments for tying up your capital in this form of investment. You attach particular importance to the safety of the security, which is guaranteed by the credit institution. Bank debentures offer additional benefits for a variety of investment strategies due to their safety. They are strategically taken into security portfolios because they balance out the higher risk of other investments.

Your advantages

  • You benefit from attractive interest payments throughout the entire term of the bond. The payment dates are fixed in advance.
  • You enjoy a high degree of safety.

Details you should be aware of

  • Between issue date and maturity, price fluctuations are possible, which means that the sale of the bond prior to maturity may result in a loss.
  • The 100% capital redemption only applies to the end of maturity.

How do bank debentures react to…

... rising interest rates?
Bank debentures with fixed interest rate fall when interest rates are rising. If you sell this debenture prior to maturity, you may record a loss.
Bank debentures with floating interest rate, on the other hand, benefit from rising interest rates. Given that these bonds ("floaters") have their interest rate periodically adjusted to a referential rate such as the Euribor, an increase in the level of interest rates also means a rising interest rate for the bond. The price of the bond tends to oscillate around face value.

... stable interest rates?
In the case of stable interest rates, neither the price nor the coupon of the bank debentures changes.

... falling interest rates?
Bank debentures with fixed interest rate increase when interest rates are falling. If you sell these debentures prior to maturity, you may record a profit.
Falling interest rates, on the other hand, have a negative impact on bank debentures with floating interest rate. Given that these bonds ("floaters") have their interest rate periodically adjusted to a referential rate such as the Euribor, a decrease in the level of interest rates also means a falling interest rate for the bond. The price of the debentures tends to oscillate around face value.





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