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If you spend money on a bond, you’re lending cash to the issuer in trade for periodic curiosity funds (referred to as coupon funds) and the return of the principal quantity, additionally known as the face worth or par worth, when the bond matures. To grasp this complete 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 charge, maturity date, and different phrases of the bond.
After issuance, bonds might be purchased and offered on the secondary market. The market worth of a bond could fluctuate based mostly on a number of elements together with modifications in rates of interest, credit score danger, 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.
If you purchase a bond, you may maintain it and gather the curiosity funds till it reaches maturity. On this case, you gained’t be affected by fluctuations within the bond’s worth – your curiosity funds and face worth will keep the identical.
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