Bonds, an integral aspect of investment portfolios, serve as a means for governments and corporations to procure funds. This financial instrument operates on the principle of borrowing capital from investors in exchange for periodic interest payments, termed coupons. In essence, bonds function as IOUs, where the issuer commits to repay the principal amount along with the accrued interest over the bond’s lifespan.
When entities issue bonds, they essentially enter into a contractual agreement with investors. This agreement stipulates that the issuer will pay a fixed interest rate, typically semi-annually or annually, to the bondholders. These interest payments serve as a form of income for the investors, offering a steady stream of returns over the bond’s tenure. The mechanism behind bonds’ ability to generate income lies in the interest payments disbursed by the issuer to the bondholders.
In summary, bonds serve as a financial tool for governments and corporations to raise capital, with investors receiving periodic interest payments in return. These interest payments constitute a source of income for bondholders, providing a predictable stream of returns over the bond’s duration. Therefore, yes, bonds do return money through the interest payments they offer to investors.
(Response: Yes, bonds generate income through periodic interest payments known as coupons.)