Investing in bonds

Investing in bonds is just like investing in stocks. Bonds are sold on the market. They are commonly known as "fixed income" securities.

Investing in bonds

When corporations or the government are trying to raise money, they sell those at a price lower than the face value.

The face value is just the original price shown on the security certificate. The price you pay for them is given as a percent of the face value.

Any interest you receive is based on the face value. The following explains how we can use skills such as percents to solve such problems.

A few examples showing how investing in bonds work

Example #1:

Find the cost of 4,000 worth of fixed income, which sold for 80% and the amount of interest you will earn if the annual interest rate is 4%.

Cost of Bond = Face value × Percent of Face

Cost of Bond = 4000 × 0.80

Cost of Bond = 3200

The cost is then 3200

Here is how to find the interest they pay you if the annual interest is 4%?

Interest = Face Value × Annual Rate

Interest = 4000 × 0.04

Interest = 160

The interest you will receive is 160.

Example #2:

Find the cost of 10,000 worth of bonds, which sold for 75% and the amount of interest you will earn if the annual interest rate is 3%.

Cost of Bond = Face value × Percent of Face

Cost of Bond = 10,000 × 0.75

Cost of Bond = 7500

The cost is then 7500

Here is how to find the interest they will pay you if the annual interest is 3%?

Interest = Face Value × Annual Rate

Interest = 10000 × 0.03

Interest = 300

The interest you will receive is 300.

Example #3:

Find the cost of 1 million worth of bonds, which sold for 80% and the amount of interest you will earn if the annual interest rate is 5%.

Cost of Bond = Face value × Percent of Face

Cost of Bond = 1,000,000 × 0.80

Cost of Bond = 800000

The cost is then 800000

Here is how to find the interest they will pay you if the annual interest is 5%?

Interest = Face Value × Annual Rate

Interest = 1000000 × 0.05

Interest = 50000

The interest you will receive is 50000

Test your knowledge with the quiz below:

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