Bonds as an asset class: From the basics to specialist knowledge

From Gerd Kommer  and  Jonas Schweizer  

Most readers of our blog will already have some idea of ​​the bond investment class. However, in our consulting practice we often experience that this bond knowledge differs quite a bit from reality due to decades of disinformation from the financial industry and often also the media or due to wishful thinking on the part of investors. With this article we want to give our readers a practical introduction to investing in bonds, an introduction that is deeper and more precise than what you can otherwise find on the Internet and in traditional media. We also take this opportunity to dispel several common myths and misconceptions about bond investing.

What is a bond?

A bond is a loan intended from the outset for ongoing trading. The bond buyer takes on the role of lender/creditor, the bond issuer takes on the role of borrower/debtor. A loan, on the other hand, is not intended for trading. In this case, the lender needs the borrower's consent if he wants to monetize (sell) his claim early. The investor could simply sell a bond freely at this moment. The two main basic categories of bonds are government bonds and corporate bonds.

The names of bonds that are outdated or are now rather unusual in Germany are: debt securities, bonds, bonds and bonds. The most common English name is Bond.

Six Key Differences Between Stocks and Bonds

• A share represents part of a company's equity, a corporate bond represents part of its debt, the company's debt. In the case of states, only foreign capital exists.
• The return on stocks and corporate bonds comes from the same source, namely the cash flows (in simple terms, profits) that the company generates. Many private investors “overlook” this important aspect because they have an “aversion” to bonds.
• The bond market is larger worldwide than the stock market. It has a larger market capitalization (market value) and there are probably 20 to 50 times as many different bonds as stocks worldwide (no one knows the exact number of all bonds). Example: There is one share (one type of share) from Siemens AG compared to more than 30 different Siemens bonds (as of the beginning of 2024). Not only is the bond market larger than the stock market, it is also older. For the proper functioning of the global economy, the bond market is just as essential as the stock market.
• As securities, bonds are more complicated than stocks. They have more different design features and levers that affect return, risk and liquidity. We'll look at the most important ones in this blog post.
• Normally, corporate bonds are lower risk and lower return than shares of the same company.
• The owner of a (conventional) share has a right to vote at the shareholder meeting of the company in question, whereas the owner of a corporate bond does not. (In the case of investment funds/ETFs, the shareholder voting right is exercised by the fund company.)

Germans traditionally have difficulty with the bond asset class

Many private investors in this country have a strange aversion to bonds. The rather “unsuccessful” but well-known German equity fund manager Dirk Müller said in an interview in 2016: “I would like to put it this way: I don't touch bonds with pliers, and if you give me some, I'll sue you.” There is no rational, objective reason for this “typically German” strangeness with bonds. In other countries, e.g. B. USA, Great Britain, Italy, France, there is no comparable aversion of private investors to corporate and government bonds.

Nine key differentiators in bonds

Bonds can be distinguished...

• by issuer type: Government bonds (and bonds of non-central government, public borrowers) versus corporate bonds including bank bonds. For issuers within a given country, corporate bonds are more profitable and riskier than government bonds from a buyer's perspective (more on this below).
• according to remaining term/duration: Short remaining term (RLZ): up to one year, medium remaining term: one to five years, long remaining term: from five years. A few government bonds have terms of up to 100 years. [1] All other things being equal, bonds with a short RL are less risky than those with a long RL. For example, the intensity of fluctuation (volatility) in the yields of a German government bond with an expiration date of 15 years is only slightly below that of the DAX 40, while the volatility of German government bonds with an expiration date of six months is close to zero. Bonds with an expiration date of up to approximately twelve months are so-called “money market investments”. They often represent a superior alternative to interest-bearing bank deposits (more on this below).
• according to creditworthiness (default risk, credit quality): Bonds with high credit ratings versus those with low credit ratings. Creditworthiness is typically expressed with rating grades that are assigned by major rating agencies. At the end of this blog post there is an explanatory table with the rating scales of the three largest bond rating agencies. The upper third of the rating spectrum is called investment grade, the lower two thirds sub-investment grade. The term “junk bonds” is often used for corporate bonds in the sub-IG zone. It is misleading in that these bonds are definitely safer (lower risk and higher quality) than the stocks of the companies in question, which no one calls “junk stocks”.
• according to exchange rate risk/currency risk: Bonds without exchange rate risk and bonds with exchange rate risk (foreign currency bonds) – more on this below.
• according to the collateral status: Unsecured bonds versus secured bonds. The vast majority of all corporate bonds and all government bonds are unsecured. The most important category of corporate bonds with collateral are Pfandbriefe (covered bonds or mortgage bonds). The corresponding Wikipedia entry provides more detailed information about Pfandbriefe here).
• after the allocation of inflation risk: With conventional bonds, the investor bears the risk of unexpectedly high inflation, which can lead to nominal and/or real price losses. In the case of “inflation-protected bonds”, it is borne by the issuer (see our blog post on inflation-protected bonds here). Less than 2% of all bonds worldwide are indexed to inflation.
• according to their tradability: On the stock exchange and/or over-the-counter. Only a relatively small minority of the millions of corporate bonds are listed (in the case of government bonds, of which there are far fewer, most have an exchange listing). Unlisted bonds can usually only be purchased by institutional investors and not by private investors. This is referred to as over the counter/OTC trading between institutional investors. For most unlisted corporate bonds, there are no “prospectuses” from which a normal private investor could easily and reliably obtain information about the characteristics of the bond.
• according to their liquidity costs: You will e.g. B. measured by the bid-ask spread. This expresses how much the buying price of a bond is above the market price at a given point in time and the selling price is below the market price. The bid-ask spreads of corporate bonds are typically wider (higher) than those of stocks. As a rule, bonds are more illiquid and therefore more expensive to buy and sell than stocks. Bonds with small issuance volumes tend to have wider bid-ask spreads than those with large volumes.
• according to the denomination (minimum investment, entry threshold): Most government bonds have a very low denomination, meaning they can be purchased in almost any small amount of money. In contrast, only a small proportion of all corporate bonds have denominations of less than 100,000 euros. As a rule, you cannot purchase fractions of bonds, so in practice many bonds are not even an option for small investors from a denomination perspective. This problem does not apply to bond funds/bond ETFs.

Within a given currency, remaining maturity and credit quality (rating) are usually the most important determinants of the future expected return and risk of a sufficiently liquid bond. The longer the remaining term and the lower the credit rating, the higher the expected return and risk are usually.

The “bond paradox”

The bond paradox could be used to describe the price effect on bonds or bond funds (a portfolio of bonds), which is initially difficult to understand for many private investors, when the market interest rate level changes: If market interest rates rise, bond prices fall, market interest rates fall then bond prices rise. This has to do with the construction, the mechanics of bonds and is unavoidable. The same mechanism, the same logic, works when demand for a bond (or the type of bond in question) increases. Then the price rises and the interest in the sense of the current yield (see below) falls, since the coupon (the regular payment, see below) remains unchanged.

The longer the remaining term/duration of a bond or bond fund, the stronger this opposite movement is. Anyone who wants to purchase bonds or bond funds/ETFs with an expiration date of over two years for their portfolio should understand this connection - in technical jargon, interest rate risk or duration risk - well in their own interest. We have it in the two previous blog posts here and here described.

Interest rate risk – unlike issuer-specific credit risk – cannot be diversified away by spreading across many bonds. However, you can greatly reduce and even completely eliminate the interest rate risk in your own portfolio by limiting yourself to bonds with a short RLZ. However, these usually produce slightly lower returns than long-term investors. For example, twenty-year US government bonds had a 1.7 percentage point p.a. increase in the 60 years to 11/2023. a. higher average yield than one-month US Treasury bonds – with ten times the volatility.

Why are bonds structurally less risky than stocks?

Government bonds are generally the lowest-risk investment in a given country and a given currency (apart from the special aspect of interest rate risk, which can be reduced almost at will by limiting it to short terms). Government bonds from a country are almost always less risky than the shares of companies based in this country, real estate in this country or packaged financial products such as endowment life insurance or certificates. Why this is the case has to do with the concept of sovereign ceiling, which we here have described.

For a given company, its bonds are generally lower risk than its stocks, lower risk, for example, measured in terms of return volatility and measured in terms of drawdown risk. The reason for this lies in the so-called cash flow cascade of a company. The bondholders legally have priority access to cash flow, profits and - in the event of bankruptcy - to the company's assets over the shareholders. We have the concept of the cash flow cascade here described in more detail.

The difference between coupon yield and current yield

The coupon yield (also misleadingly known as the distribution yield) represents the current interest payments specified in the bond prospectus in absolute monetary units. However, it is usually expressed as a percentage p. a. stated, i.e. the sum of the fixed annual interest payments in relation to the original Face value when the bond is issued. The coupon yield has little to nothing to do with the actual, real yield of the bond. A high coupon yield can easily be associated with a very low total return from distributions and price increases, and a low coupon yield can be associated with a very high total return.

From a tax perspective, other things being equal, you should prefer bonds with the lowest possible coupon yield, as these have a tax present value advantage over high-coupon bonds over long holding periods. This advantage is greatest for bonds without any coupon (zero coupon bonds, zero bonds). Here, the “built-in” price profit replaces all distributions that would be made on a comparable normal bond with a coupon. As is well known, capital gains are only taxed at the time of sale or maturity, i.e. not every year (“subsequent taxation”). We have a look at how the potentially valuable tax present value advantage arises for low-coupon bonds or stocks in relation to their price increases here explained. (The tax present value advantage is not significant for bonds with short remaining terms.)

The current yield or yield to maturity is the total return known when buying the bond from interest and price changes up to maturity - under the two assumptions that you do not sell until maturity and that there is no default by then. Smart investors focus on the current yield, not the actually insignificant coupon yield.

On many financial portals and in fact sheets for bond funds, the current yield is only called “yield”, “effective yield”, “repayment yield”, “maturity yield”, “effective interest rate” or – on English-language portals – “yield” in an unclear and potentially misleading manner. The only really correct, non-misunderstanding terms are current yield and yield to maturity (YtM).

The yield curve

The yield curve is the graphic representation of the relationship between the (remaining) term of bonds (in the sense of the overall market) and their current yield. If the yield curve has a normal shape (rising from bottom left to top right with a decreasing slope), then current yields for longer bonds are higher than those for shorter bonds. Based on this consideration alone, every investor would naturally only buy very long-term bonds if it were not for the disadvantage of the above-mentioned interest rate change risk, which increases with the remaining term, i.e. the increasing volatility.

Figure: A schematically simplified, normal yield curve

► For the bonds under consideration, it is implicitly assumed in a yield curve that they all have the same currency and credit rating, i.e. e.g. B. Government bonds of the Federal Republic of Germany with different maturities. ► Currently (Jan. 2024) the yield curve in most currencies is inverted, i.e. h. short maturities have higher current yields than long maturities. Over the past 100 years or so, inverted yield curves have only existed about 10% of the time.

A look at the interest rate history

The following graphic shows the current yields on ten-year government bonds for Germany and the USA from January 1960 to October 2023 (almost 64 years). The chart suggests that the 40-year strong interest rate reduction trend from the early 1980s to 2021 and the associated strong price gains in long-term bonds were a historical anomaly. A return to “more normal” interest rates from 2022 can be seen.

Figure: Nominal current yields on ten-year German and American government bonds from January 1960 to October 2023 (63.8 years) in local currency

► Rolling average of monthly returns for the previous 12 months. ► Source: Federal Reserve USA/St. Louis.

Call risk for corporate bonds

Many and in the USA the majority of all corporate bonds contain a so-called call clause. It states that after an initial blocking period has expired, the company may redeem the bond early at any time at face value (“at 100”) or at another fixed amount. The company will exercise such a special repayment option if the market interest rates for the given remaining term of the bond have fallen significantly compared to the current yield at issue and at the same time the company's credit rating has not deteriorated significantly since then. In this situation, the price of the bond will be significantly higher than the issue price or face value. Through the special repayment, the company can now replace the old, expensive debts with new, cheaper ones. For the owner of the bond, the exercise of such a special repayment by the company is a downside because he is losing an investment that is particularly attractive at that moment without full compensation. Of course, the call risk is priced in when the bond is originally issued. If there was a special repayment, holding a bond with a call clause was disadvantageous; if not, it was advantageous - due to the small additional remuneration priced in compared to a bond without a call risk. There are almost never call clauses on government bonds.

Is it worth investing in foreign currency bonds if the interest rate in the foreign currency is higher?

Some private investors look eagerly at the higher market interest rates in other currency areas (from a German perspective, these are currently the USA, Australia, Norway, for example) and ask themselves whether bond investments in these higher-yielding foreign currencies are worthwhile. The short answer: If the bond investment in question is intended to have a risk-dampening effect in the overall portfolio, then probably not. It is impossible to reliably predict the short and medium-term development of exchange rates. The exchange rate risk is usually so high that it completely “swamps” and destroys the low-risk character of a high-quality bond investment. A numerical example: The volatility of short-term US government bonds (One Month Treasury Bills) in the period 1975 to 2023 was eleven times as high when measured in DM or euros as in USD.

Higher nominal interest rates in country A are also often accompanied by higher inflation rates there and/or higher political risks relative to country B. Both can lead to gradual or sudden devaluations of currency A relative to currency B. And due to the so-called interest rate parity theory, the returns on government bonds from high-interest countries, when calculated in the currency of a low-interest country adjusted for inflation, are about the same in the very long term. More about exchange rate risk in our blog here.

The Swiss franc is a currency that constantly appreciates against other currencies due to the very low inflation in Switzerland for around 30 years (not before that) and other factors. Is it therefore worthwhile for an investor in the Eurozone to speculate on gains from the appreciation of the franc? No. The appreciation gains were not high enough in the long term to compensate for the particularly low CHF interest rates.

For bond funds/ETFs, the fund currency (reporting currency) of the fund or the trading currency on the stock exchange plays no role in the actual currency risk of the bonds in the fund relative to the investor's “home currency”. The decisive factor for the risk is the currency of the bonds or the currency hedging of these bonds within the fund, if one exists.

Why calling bonds a “fixed-interest investment” is wrong

Bonds are traditionally referred to in the industry as “fixed income” investments. In view of this terminology, one could not blame a non-bond professional if he understood “fixed interest” to mean something like “fixed” or “fixed” return. Unfortunately, he would be wrong. Bond yields are not fixed or fixed in several ways. In the case of long-term bonds, the relevant total returns fluctuate over short and long periods of time due to the ever-present risk of interest rate changes, and in the case of very short-term bonds one cannot speak of “fixed interest” from the outset, since the (approximately) “fixed interest rate” only lasts for a few months or one or two years at most. In addition, the existence of default risk or liquidity risk, which can affect the short-term or long-term return of basically any bond up or down, makes the idea of ​​“fixed income” absurd. The only thing that is “fixed” or “fixed” in a bond is the coupon amount, one of the most economically unimportant features of a bond.

The fact that bond yields generally fluctuate less than the returns on stocks or other asset classes and financial products does not mean that bonds are “fixed interest”. The term “fixed interest”/“fixed income” is therefore incorrect and completely unnecessary.

Can you reduce risk by investing in individual bonds instead of bond funds?

A foolish myth that has persisted since the advent of bond ETFs and is continually rehashed by “experts” is that by investing in individual bonds, provided you hold them until maturity, you can “greatly reduce” or even “avoid” return risk. Reason: Since when you buy a bond you know its current yield until maturity, you have eliminated all risk.

Unfortunately, this is wrong or highly misleading in many ways:

(a) If you calculate in inflation-adjusted categories - which you should ideally do - the nominal current yield known to maturity when you buy an individual bond is in no way the same real (real) investor return to maturity, as we do not know at the beginning what inflation will be.

(b) If the individual bond investor reinvests the proceeds in a new bond when the bond matures, his return over the entire term of the two bonds was by no means known - just like with a bond ETF. Almost no one holds just one bond anyway, but rather two or more, which then forms a bond portfolio - just like a bond ETF.

(c) Almost no one holds just one bond anyway, but rather two or more, which then forms a bond portfolio - just like a bond ETF.

(d) In reality, many private investors who buy a single bond to hold it until maturity will not actually implement this intention because for some unplanned reason they want or need to sell the bond early.

(e) For every rational (or irrational) investor, it is not only the return to maturity that counts, but also the return and its fluctuations for shorter sub-periods before Reaching the due date. The price of a bond with a ten-year remaining term and a bond ETF with a ten-year remaining term - two bond investments with the same duration - fluctuate about the same amount in the phase immediately after purchase, roughly speaking in the first two years. If the individual bond investment is a corporate bond, it will probably initially fluctuate even more than a corresponding bond ETF because the bond has a large diversification disadvantage compared to the ETF and probably also a liquidity disadvantage. Individual corporate bonds can easily default, i.e. fail. Even then it was nothing like the return we knew from the start.

(f) The remaining term (duration) of an individual bond decreases with each passing day and each passing year. With a bond ETF, on the other hand, the duration remains constant over time - this is usually an advantage for portfolio management reasons. [2] Since duration is one of the two central factors influencing the return-risk character of a bond investment, it is hardly possible to meaningfully compare an investment in an individual bond and in a bond ETF with initially identical duration after one or two years. The more time passes, the more these two investments become “apples and oranges” in terms of return and risk until the individual bond matures. When two investments differ greatly in a key risk dimension, one-dimensional risk comparisons are useless at best and misleading at worst.

(g) If the yield curve rises monotonically (as is the normal case, see chart above), the market interest rate level does not fall significantly (as it does over 50% of the time) and the duration is initially identical, the bond ETF will generate a higher return until the individual bond matures.

The most compelling motive for buying long-term bonds is so-called “asset-liability matching.” [3] which is particularly important for banks, insurance companies and other large industrial companies. For normal do-it-yourself private investors, ALM rarely plays a role if you ignore over-theoretical mind games.

In short: Individual bonds that are held until maturity are therefore, firstly, not risk-free in several respects and, secondly, cannot be meaningfully compared with a diversified bond ETF anyway.

Is it a disadvantage of bonds that they are not real assets?

Many supposed experts from the financial industry and also numerous financial journalists see the disadvantage of bonds (and bank deposits) in that they are not “tangible assets”, but rather “non-tangible assets”, “nominal values” or “paper assets”. Unfortunately, the material asset concept suffers from so many inconsistencies, misunderstandings and obvious errors that it is, overall, completely useless, if not harmful - at least for someone who thinks about investing with the aim of gaining real knowledge. We introduced the nonsense of the “material value theory” some time ago this blog post analyzed.

However, the term tangible asset is not useless for those who use strange arguments to market risky “tangible assets” with high additional costs to private investors or who, as media representatives, want to generate circulation and clicks with this nonsense concept.

Do bond indices suffer from a structural design flaw?

Most bond indices (and therefore the ETFs that track these indices) are weighted by market capitalization (stock market value) - as is the case with conventional stock indices. However, market cap weighting makes less sense for bond indices (bond ETFs) than for stocks. In the case of the latter, a high market capitalization and, as a result, a high weight in the stock index means that the company will achieve high profits in absolute (not necessarily relative) terms in the future. In the bond world, this basic principle doesn't necessarily apply. From the perspective of some, a high market cap for the company's bonds can mean the "opposite", namely that the company or the state is heavily indebted.

Nevertheless, this criticism of conventional bond indices must be put into perspective in that, firstly, companies or states with high levels of debt in absolute terms are usually also large companies or states overall. The high weight of these companies or countries in the index is also a result of their general size and not just their high level of debt. Secondly, the market naturally prices in the negative credit rating effect for highly indebted companies or countries. The current yield on the bonds of these comparatively more indebted companies/states is correspondingly higher than that of comparable companies with lower levels of indebtedness. In other words, the bond investor is compensated ex ante for this risk. And thirdly, most corporate bond indices contain caps for issuers, i.e. upper limits on the weight of individual companies.

Does the default of a bond mean that you as an investor lose everything?

Rating agencies define a bond as default or, more precisely, payment default (default, default) if the debt service (interest and repayment at the end of the term) is not provided as contractually agreed for 90 days or more. A payment default is by no means synonymous with corporate bankruptcy or a “bankruptcy”, nor with an actual or probable 100% loss for the investor. For corporate bonds, the average recovery rate for a default based on long-term historical data is in the order of 35%, for government bonds it is in the order of 60%. By the way: “State bankruptcy” is a highly misleading word for laypeople, since a state cannot go “bankrupt” or “bankrupt” in the same sense as a company. There is also no bankruptcy law or bankruptcy regulations (insolvency regulations) for states.

Does active investing work better with bonds than with stocks?

No. The vast majority of actively managed bond portfolios underperform a correctly chosen passive, buy-and-hold benchmark (such a comparison should take costs, taxes and risk into account). The rate of actively managed loser portfolios increases with the length of the evaluation period and approaches the 100% mark for time windows over ten years. The minority of outperformers in a given time window - whether one year or 15 years - cannot be reliably predicted ex ante because, according to the prevailing opinion in science, the composition of this minority is largely determined by chance, i.e. luck.

When bonds are the superior alternative to interest-bearing bank deposits

The central consideration in this context is that interest-bearing or non-interest-bearing bank deposits are only suitable for rational investors up to a maximum amount of 100,000 euros per bank-customer combination, i.e. up to the upper limit of the statutory/state deposit protection in EU countries. (In Switzerland and Liechtenstein there is no deposit insurance with similarly binding state backing.) Bank balances above a state deposit guarantee are generally at risk of failure if the bank “falls over” (this does not apply to the contents of bank deposits, as these contents would not be part of the bankruptcy estate of the bank in question). We know how big the risk of bank failure is and why it is generally underestimated here analyzed.

An ETF-based money market fund investment is fundamentally safer than a bank deposit from a default risk perspective for amounts above 100,000 euros (deposit protection limit). In addition, a money market fund produces higher returns than the average daily money at one of the approximately 1,600 banks in Germany. We have the extremely relevant but still little-known investment form of money market funds for private investors this blog post shown.

Anyone who wants to match or (marginally) exceed the return of a money market fund investment with overnight money (within the statutory deposit protection limit) must necessarily engage in “overnight money hopping”, i.e. continually open and close bank accounts and also read a lot of the “small print” about the conditions of these temporary decoy offers. Not everyone wants this or has the time for it.

In terms of flexibility and liquidity, fixed-term deposits (as opposed to overnight deposits) cannot be compared to a much more liquid money market fund investment that is de facto available on a daily basis.

What type of bond is best for mitigating the risk of an equity portfolio?

 If you want to reduce the level of risk in a portfolio invested primarily in stocks and aim for a more conservative return-risk combination than in a pure stock portfolio, you could use the following criteria as a guide when structuring the relevant bond component: (a) Only short-term bonds or bond ETFs (preferably less than three years remaining term/duration). (b) High-quality bonds, i.e. bonds in the upper investment grade range, ideally only up to A- or A3 (see rating table below). Because the credit ratings for corporate bonds are on average worse than for sovereigns, high diversification across at least 100 different issuers is important in order to diversify away the risk of default. (c) No exchange rate risk. If foreign currency bonds, then those with an exchange rate hedge to the domestic currency (this is easily achieved via bond ETFs).

Conclusion

• The bond world is more complex than the stock world. Private investors can manage much of this complexity by investing in diversified bond indices (low-cost bond ETFs).
• Daily deposits at banks are only an acceptable alternative to bonds in terms of risk for amounts of up to 100,000 euros per bank-customer combination (statutory deposit protection in the EU).
• Since around the beginning of 2022, private investors have been able to look forward to a return to a more normal nominal and real interest rate world than existed in the Eurozone between 2016 and 2021 (“zero interest rate phase”).
• By adding a bond component, the risk of a stock portfolio can be reduced in accordance with the wishes and needs of the investor household.
• Active investing, speculating in bonds, be it through actively managed bond funds or do-it-yourself investments with individual bonds, works just as badly in the long term as active investing in stocks.
• When it comes to corporate bonds, investing in individual securities often means high costs and unnecessary risk of default that can be easily avoided using bond ETFs.
• The idea that individual bonds - provided there is an intention to hold them to maturity - are somehow lower risk than bond ETFs is based on a misunderstanding, apples-to-oranges comparisons or wishful thinking.

Attachment

Table: Bond rating scores for the three largest rating agencies

► Bond ratings only express default risk, not Volatility risk or liquidity risk. The ratings always refer to one individual Bond. They do not take into account any diversification effects that reduce default risk in a portfolio of bonds from different issuers. ► The rating, the “rating forecast” only applies for the following approximately 12 months and not beyond. Rating agencies reserve the right to change a rating at any time and without notice, and this happens often. ► The numerical distances regarding the underlying statistical risk of default between the 20 or so rating levels are not linear (are not the same size between two given grades), they are very small at the upper (good) end of the scale and increase sharply with each downward rating grade. This must be taken into account when calculating “average ratings” of two or more bonds. ► The table shown here has been simplified in several places compared to the official tables of the relevant rating agencies for reasons of space. The explanations for the individual grades in the right column come from the German Wikipedia entry “Rating”. Further details on bond ratings can be found on the English Wikipedia here.

Endnotes

[1] In the 19th century and before, states regularly issued bonds with no maturity date and therefore no planned repayment. In the case of Great Britain, these bonds, called “Consols”, still exist today; in other countries they were usually redeemed at some point or disappeared as part of a currency reform.

[2] Only with so-called maturity ETFs (Target Maturity ETFs), which were offered in Germany for the first time in 2023, does the duration decrease with each passing day, like with an individual bond. For reasons of space, we will not discuss term ETFs here.

[3] For reasons of space, we will not discuss asset-liability matching here. There are many explanations for this on the internet.