# Bond Investing Guide 2: How to make money with Bonds

October 23, 2009

This is the continuation of our series on How to Invest in Bonds.

In Bond Investing Guide 1: What are Bonds? you learned what bonds are, how they differ from stocks, and some jargons associated with bond investing.

Here in Part 2, you will learn how to earn from bonds.

There are two ways to make money from bonds: through coupon interest and bond trading. In this article, we will only focus on the first method — coupon interest — and we will defer the discussion of the second method in a later article.

What is Coupon Interest Payment?

The coupon rate is the interest rate the bond pays. This rate is usually fixed for the duration of the life of the bond, although some bonds pay a floating rate, meaning the interest rate is adjusted based on a benchmark rate.

The rate is always quoted in percent, and the interest payment is simply the coupon rate multiplied by the par value of the bond.

How to compute the Interest Payment

Let’s use as example a bond paying a coupon rate of 8% annually with a par value of P100,000.

The interest payment can be computed by multiplying the coupon rate of 8% with the P100,000 par value of the bond.

8% x P100,000 = P8,000

Since the bond pays annually, it will pay bondholders P8,000 interest every year until the maturity date.

Annual- vs. Semiannual- vs. Quarterly-Paying Bond

If, for example, the same bond pays semiannually rather than annually, it will pay interest twice every year (every 6 months). The annual interest payment of P8,000 will simply be divided into two payments, which means the bond investor will get P4,000 every 6 months.

On the other hand, if the bond pays quarterly, the P8,000 annual interest will be divided into four interest payments (to be paid every 3 months). Thus, an investor will receive four payments of  P2,000 payable every 3 months.

Pros and Cons of receiving Interest early

In all of those scenarios, the investor will receive a total of P8,000 interest at the end of every year. In the case of semiannual- or quarterly-paying bond, however, the investor receives part of the interest earlier compared to a bond that pays annually. The investor thus benefits from the time value of money because he or she already gets hold of the money rather than waiting for the end of the year to receive the cash.

The risk, on the other hand, is that if the investor wants to reinvest the coupon payment received but interest rates have fallen, the funds can only be reinvested at a lower rate as opposed to the higher rate offered by the original bond. This risk of reinvesting these funds at a lower rate is called reinvestment risk.

Reinvestment risk and other risks associated with bond investing will be discussed in Part 3 of our series on How to Invest in Bonds.

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• http://earningstudent.blogspot.com ice_hot

hi sir! just wanna know what’s the usual bond interest rate that is offered here in the philippines. also magkano naman ang usual minimum investment?
.-= ice_hot´s latest blog ..Blog Makeover Service =-.

• http://reybg87.wordpress.com Reynaldo

nice blog :)

I’m pretty sure we can learn a few things from each other – specially making money online ;D

Maybe you should take a look at this:
http://reybg87.wordpress.com/2009/10/23/post-15-how-to-make-easy-massive-money-online-tip-4/

• http://www.pinoymoneytalk.com/ James | PinoyMoneyTalk.com

@ice_hot, it depends on the bond. Government bonds currently pay around 4-6% interest depending on the maturity period, while corporate bonds pay as much as 6-10% also depending on the length of investment. Minimum investment amount varied per bank you will open an investment account with. Some banks require around P100,000 while some require P1 million minimum.

reynaldo, how foes this PTCsense work? are they really paying? ty

• http://jonhappiness.blogspot.com jonharules

Medyo natagalan din bago ako bumisita dito ulit ah. Magaling, magandang article itong naisip mo James. Hindi naman pala nagkakalayo ang interest rate ng Time Deposite tsaka bonds kung 4-6%.
.-= jonharules´s latest blog ..Got Invited to Preview Sponzai =-.

• http://earningstudent.blogspot.com ice_hot

hi! thanks for answering my question. see, if i have all the money in the world and i dont know what to do with it, then maybe i will invest in bonds. i say this because, there are a lot of other things to do with your money that would yield a higher rate of return.

so, when i have lots of money, then i could consider investing in bonds. having bonds in your portfolio is a good way to protect your money for the long run.
.-= ice_hot´s latest blog ..Joel Christopher Manila Seminar 25 Nov 2009 =-.