Investing in bonds can be an attractive way to save for retirement or to add return to a portfolio of investments. When you buy a bond, you are essentially lending money to the bond issuer, in exchange for regular interest payments and the return of the principal at the end of the bond’s term.

A bondholder that owns a $1,000, 10%, 10-year bond has invested $1,000 and will receive an annual interest payment of $100 (10% of the bond’s face value). At the end of the 10-year bond term, the bondholder will receive back the $1,000 principal. The bondholder has the right to sell the bond before the term ends, and the market value of the bond will fluctuate with changing interest rates.

Interest payments from bonds are generally considered taxable income, and are reported on a yearly basis. Investors should consult their tax advisors on the specific implications of bond investing.

How does a bondholder benefit from owning a bond?

By owning a bond, a bondholder can benefit from the steady stream of income in the form of interest payments. They also benefit from the security of knowing that their investment will be repaid at par value at maturity, even if the issuer goes bankrupt in the meantime. Additionally, bonds can provide bondholders with a degree of protection against inflation, as the interest payments are usually fixed and therefore insulated from fluctuations in the price level. Finally, bonds can provide diversification to a portfolio, adding stability when stock prices are volatile.