A bond is a debt security issued by governments, companies or other entities to raise funds. Basically, by buying a bond, the investor is lending money to the bond issuer in exchange for periodic interest payments (called coupons) and repayment of the principal amount on the bond's maturity date.
The profitability of a bond for the investor can be calculated based on two main factors:
- Interest (Coupons): Periodic payments that the issuer makes to the investor, usually at six-monthly or annual intervals.
- Capital Gain (or Loss): If the bond is bought or sold on the secondary market at a price above or below the nominal value (usually $1,000), the investor may make a loss or a profit.