## How to invest and make money with Bonds

*in*Bonds

In the first article in our Bond Investment Guide series “What are Bonds?” you’ve learned what bonds are, how they differ from stocks, and some jargons associated with bond investing.

Here in Part 2, you will learn how you can make money from bonds.

There are two ways to earn in bond investing:

- Through coupon interest payments; and
- Bond trading

In this article, we will focus on the first method: coupon interest payments.

**What is Coupon Interest Payment?**

Simply speaking, the **coupon rate** is the interest rate that the bond pays. This translates to the income the holder of the bond will be receiving.

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 Coupon Interest Payment**

To make it easier to understand, 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.

Mathematically:

- 8% x P100,000 = P8,000

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

**Date of Coupon Interest Payments**

As mentioned earlier, some bonds have varying dates of payments. Some pay **annually** (once a year), some pay **semi-annually** (every 6 months), while some pay **quarterly** (every 3 months).

If, for example, the bond in our example above pays semiannually rather than annually, it will pay interest twice every year, that is, every 6 months.

The annual interest payment of P8,000 will then 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, for a total of P8,000 interest income still for the year.

**Which Interest Payment Period is Better?**

In all scenarios above, 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 benefits from the time value of money because he or she already gets hold of the money rather than wait 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”**.

(Read Part 3 in our Bond Investing Guide: **Risks in Bond Investing**)

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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?

nice blog :)

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

@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.

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%.

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.