Yes, bonds return money to investors.
How Bonds Return Money
Bonds work by lending money to a borrower, typically a government or corporation, in exchange for regular interest payments and the eventual repayment of the principal amount.
- Interest Payments: These are regular payments made by the borrower to the bondholder, usually at fixed intervals (e.g., monthly, quarterly, or semi-annually).
- Principal Repayment: At the bond's maturity date, the borrower repays the original amount borrowed (the principal) to the bondholder.
Example
Imagine you purchase a $1,000 bond with a 5% interest rate and a 10-year maturity.
- You would receive $50 in interest payments each year ($1,000 x 5%).
- After 10 years, you would receive your original $1,000 principal back.
Different Types of Returns
- Interest Income: As mentioned above, bonds generate regular interest payments.
- Capital Gains: If the bond's market price increases above your purchase price, you can sell it for a profit.
- Capital Losses: If the bond's market price decreases below your purchase price, you may experience a loss when selling.
Bonds can be a valuable addition to an investment portfolio, offering a steady stream of income and potential for growth.
