Chapter 1 of 15
What is a Debt Security?
The legal distinction between bonds and loans under German law
8 min read
What am I actually buying when I buy a bond?
Bonds Are Not Loans
A bond is not a loan. This is a critical distinction under German law. Understanding this difference is fundamental to grasping how debt securities work.
Loan vs. Bond Comparison
| Aspect | Loan (Darlehen) | Bond (Schuldverschreibung) |
|---|---|---|
| Legal basis | BGB § 488 (lending law) | BGB § 793 (securities law) |
| Relationship | Bilateral contract between lender and borrower | Issuer's promise to the bearer of the document |
| Transferability | Assignment required (Abtretung) | Freely tradeable as a security |
| Documentation | Loan agreement | Bond certificate or book entry |
| Negotiation | Customized terms | Standardized terms |
| Market | No secondary market | Active secondary market trading |
What is a Schuldverschreibung?
A Schuldverschreibung (debt security/bond) is a document in which an issuer makes a promise to perform (typically pay money) to whoever holds the document. Under § 793 BGB: > *"If someone has issued a document in which they promise a performance to the holder of the document, the holder may demand the performance from them according to the promise."*
Key Characteristics
- It's a promise, not a loan – You are not "lending money" to the issuer. You are acquiring a security that entitles you to repayment under its terms.
- You are a creditor, not a lender – Your rights arise from the bond's terms and conditions, not from a lending relationship.
- The document is constitutive – The right cannot exist without the document (or book entry).
- Transferability – Unlike loans, bonds can be freely bought and sold on secondary markets.
Types of German Debt Securities
- Inhaberschuldverschreibung (Bearer bond) – The holder is entitled to payment; no name recorded. Most common form.
- Namensschuldverschreibung (Registered bond) – Holder's name is registered with the issuer.
- Orderschuldverschreibung (Order bond) – Transferred by endorsement.
GERMAN EXAMPLE
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.
KEY TAKEAWAY
A bond is a tradeable promise of repayment. You are a creditor with rights under the security's terms—not a lender in a contractual relationship.