When a company wishes to raise money, it will often choose to float an issue of bonds. It does this by selling these bonds -- these are essentially debt obligations, in which the issuer is required to make regular payments to the bond holders -- to investors. Depending on their relative risk -- meaning the risk that the issuer will default -- the bonds may be invested in as a speculative, short-term investment or a stable, long-term investment.
Investing in Bonds
There are generally two ways in which to make money on an investment in bonds. First, you can purchase the bonds, hold them, and receive payments of interest from the bonds' issuers. When a bond has reached maturity, it can then be cashed in for the principal. However, a bond may also fluctuate in value, particularly if the bond is considered relatively risky, on the chance that the issuer will default.
Short Terms Gains
Short term gains in the bond market can come in two ways. First, the interest rate can change suddenly. When this happens, the value of the bond changes, as the money that an investor would receive on this bond differs from the money he would receive on a comparable bond issued now. In addition, the value of a bond may fluctuate if the bond's risk is reconsidered by investors. However, stable bonds don't fluctuate in price very much.
Long Term Gains
Long term gains for a bond investor can come in a similar way as through short term gains, from changes in the interest rate and the bond's relative risk. However, a bond holder may also simply choose to hold onto the bond and then continue to receive the scheduled interest payments. Over a long period of time, this can produce a handsome income.
An investor does not necessarily have to invest with the intention of receiving exclusively a short-term or a long-term gain. Depending on where he expects interest rates to go, the investor may be able to purchase a relatively stable bond and receive interest payments in the medium or long term and then potentially hope to see an appreciation of the bond's value in the near term.
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