There are two main ways to profit from investing in bonds: fixed income (interest income + repayment of capital at maturity) and capital gains (price difference).
Before investing, it is important to clearly understand your goals. For most people, investing in bonds should not be about capital gains (price difference). If you aim to profit from price differences, you might consider stocks or other commodities, or use interest rate futures, rather than buying bonds.
Fixed income (regular interest payments): Bonds, similar to fixed deposits, are an investment tool that generates regular interest.
Less risk volatility (above investment grade): Compared to stocks, bonds have lower risk volatility.
Let’s now look at the two sources of bond profit.
Source of fixed income income One: Fixed income (Interest + Capital repayment at maturity)
Bonds are known as fixed income securities. Similar to fixed deposits, they offer the possibility to collect fixed interest each period and to receive the nominal value (capital) back at maturity. In addition to interest, the purchase price of a bond may not always be equal to its nominal value, with potential gains (or losses) beyond interest. The difference between bonds and fixed deposits is that, while fixed deposits are almost risk-free, bonds may involve the risk of not receiving interest or capital payments.
Source of fixed income income Two: capital gains
In the case of individual bonds, in the absence of default, yields are fairly certain. Before maturity, the price will fluctuate based on future interest rate expectations and market risk sentiment. Bond funds and bond ETFs, although they have no maturity dates, are also affected by interest rates. Professional institutions, supported by teams of experts, can use precise models to assess bond prices. Even with such resources, trading bonds with professional institutions is a complex task, not to mention the fact that it is even more challenging for ordinary people who do not have access to these instruments to obtain capital gains from bond investments.
