What is Debt Security?
A debt security — in German: Schuldverschreibung — is a tradeable document in which the issuer promises to pay back money to whoever holds it. It's the foundation of bond markets worldwide and includes government bonds, corporate bonds, and structured products.
A debt security is a tradeable financial instrument representing a loan made by an investor to an issuer. The issuer promises to repay the principal plus interest according to the security's terms. Unlike a bank loan, debt securities can be freely bought and sold on secondary markets.
Legal Definition
Under German law (§ 793 BGB), a Schuldverschreibung is a document where the issuer promises a performance to whoever holds it. The holder can demand payment according to the promise. This is fundamentally different from a loan (Darlehen), which is a bilateral contract.
Types of Debt Securities
The main types are: Bearer bonds (Inhaberschuldverschreibungen) where the holder is entitled to payment; Registered bonds (Namensschuldverschreibungen) where the holder's name is recorded; and Order bonds (Orderschuldverschreibungen) transferred by endorsement. Bearer bonds are most common in Germany.
Key Features
All debt securities share common features: a face value (amount repaid at maturity), a maturity date, and typically interest payments (coupons). They are tradeable on secondary markets, meaning you can sell before maturity. The price fluctuates based on interest rates and credit risk.
Debt Security vs. Loan
| Aspect | Debt Security | Loan (Darlehen) |
|---|---|---|
| Legal basis | BGB § 793 (securities law) | BGB § 488 (lending law) |
| Relationship | Promise to bearer | Bilateral contract |
| Transferability | Freely tradeable | Assignment required |
| Documentation | Bond certificate/book entry | Loan agreement |
| Market | Active secondary market | No secondary market |
Practical Example: Buying a Bund
When you buy a Bundesanleihe (ISIN: DE0001102309), you acquire a debt security issued by the Federal Republic of Germany. You become entitled to receive coupon payments and principal repayment according to the bond's terms. You can hold it to maturity or sell it anytime on the secondary market.
Frequently Asked Questions
What is a debt security in simple terms?
A debt security is essentially an IOU that you can trade. The issuer owes you money (principal plus interest), and you can sell this claim to someone else before maturity.
Is a bond the same as a debt security?
A bond is the most common type of debt security. Other types include notes, bills, certificates of deposit, and commercial paper. All are debt securities.
Why buy debt securities instead of giving a loan?
Debt securities offer liquidity — you can sell them anytime. They're also standardized, transparent, and often backed by stronger legal protections than private loans.
Are debt securities safe investments?
Safety depends on the issuer. German government bonds (Bunds) are among the safest investments globally (AAA-rated). Corporate bonds carry more risk. Always check the credit rating.
Understand Bonds — Step by Step
Our free 15-chapter course explains how bonds work — from the basics to portfolio construction.