Two ways to make money from bond
- Bond Yield
- Bond Investors receive a coupon if bond held to maturity. The coupon corresponds to a level of yield (or interest) on the bond principal (or face value).
- These coupons makes up the major contribution to an investor’s return.
- The unvarying nature of coupons from bonds is the basic of investor’s total profit!
2. Potential Capital Appreciation
- There is a bond secondary market where bond before maturity may be traded at prices agreed upon by both the buyer and the seller.
- Investors may earn from potential capital appreciation if the yield on the bond declines, resulting in a corresponding increase in the bond price.
- In contrast, if bond yields increase, there may be mark-to-market losses – an investor who wishes to sell the bond in the secondary market prior to maturity could face losses on the bond.
After all, different to stock investment, bond investor has the option of waiting for the bond to mature to avoid realising mark-to-market losses.