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Home » How do bonds make money?

How do bonds make money?

Bonds are essentially loans obtained by companies. Rather than seeking funds from a traditional bank, companies opt to raise capital by issuing bonds to investors. When investors purchase these bonds, they provide the company with the necessary funds. In return for this capital injection, the company promises to pay back the investors along with an added interest, known as the interest coupon. This interest coupon represents the annual interest rate paid on the bond, calculated as a percentage of its face value.

Investors, by purchasing bonds, essentially become creditors to the issuing company. They lend money to the company with the expectation of receiving both the principal amount and the agreed-upon interest over a specified period. Bonds typically have a fixed term, at the end of which the company repays the principal amount to the bondholders. Throughout the bond’s tenure, investors receive periodic interest payments, which contribute to their overall returns.

Moreover, bonds offer investors a relatively predictable income stream compared to other investment avenues. The interest payments are typically made at regular intervals, providing investors with a steady source of income. Additionally, bonds are generally considered less volatile compared to stocks, making them an attractive option for investors seeking stability in their investment portfolio.

(Response: Bonds make money through interest payments, which are a percentage of the bond’s face value paid annually. Investors lend money to companies by purchasing bonds and receive both the principal amount and the agreed-upon interest over a specified period.)