Bonds are issued by governments, companies and other bodies seeking to raise capital or funds from the public. Bond Purchase literally means lending money to the bond issuer. This implies that, the reward for lending money is to receive a steady stream of payments (also known as interest payments or coupons) at periodic intervals throughout the tenure or the lifetime of the bond. This amount received (interest payments or coupons) is expressed as a percentage of the face value (the original money lent). At the end of the bond’s tenure or lifetime, the lender then receives a 100 percent of the bond’s face value.
On the other hand, there are some bonds that do not offer coupon or interest payments (zero-coupon bonds), these are priced at a discounted rate from their face value. When the bond reaches maturity or ends its lifetime, the face value (original amount) of the bond, along with the accumulated interest will be received. The yield of a bond is dependent on the credit quality (default rate) of the bond issuer. The top quality bonds are usually issued by the government, followed by bonds from government-linked companies, banks and corporations.
Why invest in Bonds?
1. Capital Appreciation
2. Stable Interest Income
3. Currency Exchange Gain