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. What is a basis point (BPS)?

    A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial ... Read Full Answer >>
  2. Do hedge funds invest in bonds?

    Hedge funds have the freedom to deploy their capital in virtually any manner. They can use leverage, invest in non-publicly ... Read Full Answer >>
  3. Do mutual funds pay dividends or interest?

    Depending on the type of investments included in the portfolio, mutual funds may pay dividends, interest, or both. Types ... Read Full Answer >>
  4. Can mutual funds only hold bonds?

    While some mutual funds include bonds in addition to other asset types, certain funds, aptly named bond funds, hold only ... Read Full Answer >>
  5. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  6. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>
Related Articles
  1. Retirement

    Retirees: How to Survive When Interest Rates Drop

    Low interest rates are a portfolio killer if you're living off of investment income. Some strategies for dealing.
  2. Investing Basics

    The Pros and Cons of Distressed Debt Investing

    Distressed debt investing is suitable for professional investors. Besides heavy risk factors to consider, this investment type can provide a large ROI.
  3. Investing Basics

    How to Get More Yield From Your Investments

    Yield seeking investors can boost the amount of income their investments generate through tweaking their portfolio of stocks and bonds.
  4. Investing Basics

    4 Assumptions That Can Hurt Your Retirement

    Retirement planning is a must, but having a plan that's filled with old and dated assumptions can cause great harm.
  5. Investing

    New Year, New Investing Strategy: Exploring ETFs

    Whether you’re a seasoned investor or new to the markets, you need to learn as much as you can about the present environment and how to navigate it.
  6. Bonds & Fixed Income

    Vanguard Income Based Funds Overview (VOO,VPU)

    Discover the different income funds that Vanguard Investments offer, using either mutual funds or ETFs and stocks, bonds or balanced investment styles.
  7. Bonds & Fixed Income

    3 Risks U.S. Bonds Face in 2016

    Learn about the major risks for the bond market in 2016; interest rate increases, high-yield bond volatility and a flatter yield curve may be issues.
  8. Bonds & Fixed Income

    PIMCO - How It Has Fared Since Its Gross Departure

    Learn about how PIMCO has seen massive outflows of investor capital since Bill Gross left the firm. Read about the recent performance of its bond funds.
  9. Bonds & Fixed Income

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
  10. Products and Investments

    Best Income Investing Strategies for Retirees

    The past few years have been tough for retirees seeking income from their investments. Here are some of the best strategies that can help.
RELATED TERMS
  1. Extreme Mortality Bond - EMB

    Investopedia defines extreme mortality bond (EMB).
  2. Debenture

    A type of debt instrument that is not secured by physical assets ...
  3. Credit Rating

    An assessment of the creditworthiness of a borrower in general ...
  4. Par

    Short for "par value," par can refer to bonds, preferred stock, ...
  5. Yield To Maturity (YTM)

    The total return anticipated on a bond if the bond is held until ...
  6. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  6. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
Trading Center