How do bonds generate income for investors?

• A. By paying periodic interest, known as coupon payments, to bondholders
• B. By distributing company profits as dividends
• C. By allowing investors to vote on corporate decisions
• D. By increasing in value due to stock price appreciation

Answer: (A)

Verified step by step guidance

1. Understand the concept of bonds: Bonds are debt instruments issued by entities like corporations or governments to raise capital. Investors who purchase bonds are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity.
2. Learn about coupon payments: Bonds typically generate income for investors through periodic interest payments, known as coupon payments. These payments are calculated based on the bond's coupon rate and its face value. For example, if a bond has a face value of \$1,000 and a coupon rate of 5%, the annual coupon payment would be \$50.
3. Differentiate bonds from stocks: Unlike stocks, bonds do not provide dividends or voting rights. Dividends are a share of company profits distributed to stockholders, while voting rights allow stockholders to participate in corporate decisions. Bonds are focused on fixed income rather than equity ownership.
4. Understand bond price appreciation: While bonds can increase in value if market interest rates decline, this is not the primary way they generate income for investors. The main source of income is the periodic coupon payments.
5. Summarize the correct answer: Bonds generate income for investors primarily by paying periodic interest, known as coupon payments, to bondholders. This is distinct from dividends, voting rights, or stock price appreciation, which are associated with equity investments.