Making Money With Bonds
Many conservative investors use bonds to provide a fixed income. They buy a bond when it's issued and hold it for one, three or ten years, expecting to recieve regular, fixed interest payments until the bond matures. When interest rates fluctuate, as they do in certain economic conditions, some investors try to make money by trading bonds rather than holding them. Bonds that are issued when interest rates are high become increasingly valuable when interest rates fall. That's because investors are willing to pay more than par value for a bond with a 10% interest rate if the current rate is 7%.
In this way, an increase in the price of a bond, or capital appreciation, often produces more profits for bond sellers than holding the bonds to maturity.
But there is also risk in bond trading. If interest rate go up, buyers may lose money because the bonds they hold don't pay as well as the newer ones being issued. And they won't be able to get back the full amount that they've paid for the bond if they sell.
