Making money on bonds involves investing in fixed-income securities issued by governments, corporations, or other entities. These bonds represent loans made by investors to the issuer, who in return pays interest payments and repays the principal when the bond matures. The return on investment (ROI) for bonds comes from two primary sources: coupon payments and capital appreciation.
Coupon payments are the regular interest payments made by the bond issuer to investors. These payments are typically made semi-annually, and the rate is fixed at the time of issuance. Capital appreciation, on the other hand, refers to the potential increase in the bond’s market value over time. This can occur if interest rates fall, making existing bonds with higher interest rates more valuable, or if the creditworthiness of the issuer improves, increasing investor confidence and demand for the bond.