How does an investor make money on bonds?

By Investopedia Staff AAA
A:

Bonds are part of the family of investments known as fixed-income securities. These securities are debt obligations, meaning one party is borrowing money from another party who expects to be paid back the principal (the initial amount borrowed) plus interest.

Investors (the holders of the bond) can make money on bonds in two ways.

First, as we already mentioned, the holder receives interest payments - known as the coupon - throughout the life of a bond. For instance, if you bought a 10-year bond with a coupon rate of 8%, the issuer would send you a coupon (interest) payment of $80 every year. (Most bonds pay twice a year so, technically, you would receive two checks for $40 each.)

Second, bonds fluctuate in price just like any security. This price fluctuation depends on a number of factors, the most important of which is the interest rate in the market. Some investors attempt to make money from the changing price of a bond by guessing where interest rates will go.

If you'd like to learn more about bonds, see the Bond Basics Tutorial.

RELATED FAQS

  1. Can individual investors profit from interest rate swaps?

    Find out how individual investors can speculate on interest rate movements through interest rate swaps by trading fixed rate ...
  2. How do I compare one junk bond to another?

    Discover how to identify, select and compare junk bonds. Learn the role that risk, yield and opportunity cost play in investing ...
  3. What are the main advantages of fixed income securities?

    Learn why the addition of fixed income securities are common among investors who are attempting to limit their exposure to ...
  4. If interest rate swaps are based on two companies' different outlook on interest ...

    See how two companies can swap interest rate payments and mutually benefit. See how these swaps arbitrage differences in ...
RELATED TERMS
  1. Next Generation Fixed Income (NGFI) Manager

    A Next Generation Fixed Income (NGFI) manager is a fixed income ...
  2. Next Generation Fixed Income (NGFI)

    Next generation fixed income is an innovative approach to investing ...
  3. Class 3-6 Bonds

    Several classes of noninvestment grade bonds held by an insurance ...
  4. Impact investing

  5. Promotional CD rate (Bonus CD rate)

    A limited-time offer of a higher rate of return on a certificate ...
  6. Direct Bidder

    An entity that purchases Treasury securities at auction for a ...

You May Also Like

Related Articles
  1. Bonds & Fixed Income

    How to Diversify with Muni Bond ETFs

  2. Bonds & Fixed Income

    Should Junk Bond ETFs Be a Part of Your ...

  3. Professionals

    Vanguard Readies Muni Bond ETF

  4. Mutual Funds & ETFs

    Is the TLT ETF a Good Bet for the Long ...

  5. Bonds & Fixed Income

    African Equities vs. Bonds: Risks and ...

Trading Center