What are two ways you can make money on bonds?

[Fundu Vishy]

You can make money in two different ways which are:

a. Interest : Every bond has a 'coupon rate' which is the interest that is paid on the face value of the bond generally. This will be your income. For eg. if you buy a 4% bond for 1 Mn Dollars you will get a 4% interest on the Mn Dollar invested .Of course, if you buy the same bond from the market, you may have paid more or less than 1 Mn Dollar depending on the market conditions and interest rate situation. Hence, you will have to arrive at the 'Yield' which is adjusted for the Premium / Discount to the face value of the bond bought in.

b. Capital Gains: One more income stream from bonds is the capital gains. Typically, the price of a bond goes up with the interest rates in the market place comes down and the price goes down when the interest rates go up. Hence, if you buy a bond and the market interest rates subsequently decrease, you will be able to generate capital gains out of the same.

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Fundu Vishy - Your 'Mutual' Friend
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