What is a 'Bund'

A bund, the German word for "bond," is a debt security issued by Germany's federal government, and it is the German equivalent of a U.S. Treasury bond. The German government uses bunds to finance its spending, and bonds with long-term durations are the most widely issued securities. Bunds are auctioned only with original maturities of 10 and 30 years.

BREAKING DOWN 'Bund'

Bunds represent long-term obligations of the German federal government that are auctioned off in the primary market and traded in the secondary market. Bunds can be stripped, meaning their coupon payments can be separated from their principal repayments and traded individually. Bunds pay interest and principal typically once a year, and they represent an important source of financing for the German government.

Bund Characteristics

The principal characteristics of bunds are that they are nominal bonds with fixed maturities and fixed interest rates. All German government debt instruments, including bunds, are issued by making a claim in the government debt register rather than producing paper certificates. A typical bund issue will state its issuance volume, maturity date, coupon rate, payable terms and interest calculation standard used. The smallest denomination of a bund is €0.01, and its redemption by the German government can be made at par value.

Significance of Bunds

Bunds are highly liquid debt securities that are eligible to be used as insurance reserves for trusts, and they are accepted by the European Central Bank as collateral for credit operations. Bunds are auctioned in the primary market at volumes in excess of €1 billion. The German government typically follows up new issues with higher volumes by producing several increases, up to about €15 billion, which helps to maintain high level of trading volume for bunds.

Bunds account for the majority of the German government debt, typically around 50% of all debt outstanding, underscoring their importance in government funding. By issuing long-term securities such as bunds, German authorities obtain a more stable source of financing with limited need for rolling over debt frequently.

Stripping of Bunds

Beginning in 1997, additional investment options have become available for investors with the introduction of stripping bunds. Stripping results in principle and interest coupons to be separated and traded on a standalone basis with the minimum amount of €50,000 and minimum denomination of €0.01. Stripping can be done by a credit institution or German Finance Agency, whoever carries the custody of the bund account. Coupon strips are typically combined based on their maturity profiles and traded under single security identification numbers. Strips originating from different types of bunds cannot be bundled together.

RELATED TERMS
  1. Treasury STRIPS

    An acronym for 'separate trading of registered interest and principal ...
  2. Strip

    1. For bonds, the process of removing coupons from a bond and ...
  3. Coupon Stripping

    The separation of a bond's periodic interest payments from its ...
  4. Government Security

    A bond (or debt obligation) issued by a government authority, ...
  5. Bond

    A debt investment in which an investor loans money to an entity ...
  6. Debt Issue

    A fixed corporate or government obligation, such as a bond or ...
Related Articles
  1. Insights

    German 10-year Bonds Trade Negative for First Time

    The benchmark 10-year German government bond, or bund, traded with an implied negative interest rate for the first time ever Tuesday morning.
  2. Investing

    German 10-Year Bund Yield Hits Record Low

    The yield on 10-year German bunds hit a record low as ECB monetary stimulus continues and investors flock to safety amidst Brexit fears.
  3. Investing

    Introduction To STRIPS

    STRIPS provide an alternative form of bond for fixed-income investors who need definite cash flows at specific times. Read the article to find out how.
  4. Investing

    Germany Auctions Bonds at Negative Rates

    More than ten trillion dollars worth of debt now carries a negative yield. German bunds are the latest.
  5. Investing

    What are Treasury STRIPS?

    STRIPS is an acronym that stands for Separate Trading of Registered Interest and Principal Securities.
  6. Investing

    Explaining Government Bonds

    A government bond is a debt security a government issues.
  7. Investing

    What's a Debt Security?

    A debt security is a financial instrument issued by a company (usually a publicly traded corporation) and sold to an investor.
  8. Financial Advisor

    Top 3 German Bonds ETFs (GGOV, BNDX)

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and private bonds issued by Germany with different duration yields.
  9. Investing

    Government Bond ETFs to Date 2016 Performance Review (ZROZ, EDV)

    Find out how government bond exchange-traded funds (ETFs) are performing YTD in 2016, and which are the best and worst performers.
  10. Investing

    The ECB Is Running Out Of Stuff To Buy

    More than 60% of German Bonds are now yielding below the deposit rate, meaning they are no longer eligible for the ECB's QE program
RELATED FAQS
  1. What is a stripped bond?

    The quick answer to this question is that a stripped bond is a bond that has had its main components broken up into a zero-coupon ... Read Answer >>
  2. What forms of debt security are available for the average investor?

    Discover the various different types of debt securities, issued by government entities or corporations, that are available ... Read Answer >>
  3. How do I evaluate a debt security?

    Look at a brief overview of the important factors to consider before purchasing a debt security, such as a corporate or government ... Read Answer >>
  4. What are the key factors that will cause a bond to trade as a premium bond?

    Learn about the primary factor that can cause bonds to trade at a premium, including how national interest rates affect bond ... Read Answer >>
  5. Can the marginal propensity to consume ever be negative?

    Find out when a bond's yield to maturity is equal to its coupon rate, and learn about the basic components of bonds and how ... Read Answer >>
  6. What is the difference between yield to maturity and the coupon rate?

    Read about some of the basic differences between a debt security's coupon rate and its yield to maturity, and learn which ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center