Once you spend money on a bond, you’re lending cash to the issuer in change for periodic curiosity funds (often called coupon funds) and the return of the principal quantity, additionally known as the face worth or par worth, when the bond matures. To know this entire course of, let’s stroll by way of how bonds work.

First, the issuer decides to boost funds by issuing bonds. The issuer determines the face worth, coupon price, maturity date, and different phrases of the bond.

After issuance, bonds could be purchased and offered on the secondary market. The market worth of a bond might fluctuate based mostly on just a few components together with modifications in rates of interest, credit score threat, and general market circumstances.

Lastly, every bond has a maturity date, which is the date on which the issuer agrees to repay the bond’s face worth to the bondholder. At maturity, the issuer “redeems” the bond by paying again the principal quantity to the bondholder. This completes the bond’s life cycle.

Once you purchase a bond, you’ll be able to maintain it and acquire the curiosity funds till it reaches maturity. On this case, you received’t be affected by fluctuations within the bond’s worth – your curiosity funds and face worth will keep the identical.