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.

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