How do bond traders typically make money from trading bonds?

• A. By charging management fees to bond issuers
• B. By earning interest payments (coupon payments) and capital gains from selling bonds at a higher price than they paid
• C. By collecting transaction taxes on bond trades
• D. By receiving dividends from the companies that issued the bonds

Answer: (B)

Verified step by step guidance

1. Understand the primary ways bond traders make money: Bond traders earn through interest payments (coupon payments) and capital gains when they sell bonds at a higher price than their purchase price.
2. Clarify the concept of coupon payments: Bonds typically pay periodic interest, known as coupon payments, which represent a fixed percentage of the bond's face value. These payments are a source of income for bondholders.
3. Explain capital gains: Capital gains occur when a bond trader sells a bond for more than its purchase price. This can happen if market interest rates decrease, making existing bonds with higher coupon rates more valuable.
4. Differentiate bonds from stocks: Unlike stocks, bonds do not pay dividends. Dividends are payments made to shareholders by companies, whereas bonds provide interest payments to bondholders.
5. Eliminate incorrect options: Bond traders do not make money by charging management fees to bond issuers or collecting transaction taxes. These activities are unrelated to the primary ways bond traders earn income.