There are a number of investment choices available for investors among which one is investing in bonds and they fall under the category of fixed-income securities. Issuing Bonds is similar to borrowing money, only the investor is the lender and the borrower is either the government or a company (also called as the issuer). Now, why do the government or companies issue bonds? It is simply a way of raising money for a particular project/ acquisitions. For an investor of bonds, there are various ways in which he/she could make money by investing in bonds. Some of these ways are as described below:

How to make money through Coupons?

The investor buys a bond and holds it until the maturity of the bond and collects interest payments (Coupon Payments) from the issuer in a regular fashion, unless it's a zero coupon bond. The coupon rate is fixed by the issuer at the time of issuing the bond and is also a function of the maturity date of the bond, and the credit rating of the issuer. For example, if you buy a bond worth Rs 1,000,000 from a company, and the coupon rate is 7%, you should collect Rs 70,000 per year in coupon income. If the maturity of the bond is 10 years, then you will receive your principal amount i.e Rs 1,000,000 after 10 years.

How to Benefit from Bond price appreciation?

There is another way to earn profit from bonds that is to sell them in the secondary market at a price that is higher than what you had paid for. For Eg: For example, if you buy bonds worth Rs 10,000 from the primary market (i.e. at the time of issuing of the bond) and then sell them at Rs 11,000 in the secondary market when their market value increases, before the maturity of the bond, you make a profit of Rs 1000.

Prices of Bonds can rise for two primary reasons, If the borrower's credit rating improves i.e it's chances of repaying the bond at maturity increases, then the price of the bond usually sees an increase. Also, if interest rates fall, investors get access to a bond that pays a higher interest rate than the market, so investors may want to buy such a bond.

Advantage of Tax-Free Bonds

Unlike other bonds, the interest earned on tax-free bonds, as the name suggests, is completely exempted from taxes. These bonds are issued by the government enterprises and hence carry very little risk of non-payment of interest amounts. The profits from these bonds usually get invested in infrastructure projects. Tax-free bonds come with a long-term maturity period of 10, 15 and 20 years and provide a decent rate of returns on the investment. However it is important to remember that the capital gains from selling these bonds in the secondary market are taxable even though the interest earned from tax-free bonds is tax-free. Tax-free bonds are therefore a right choice for individuals falling under the highest income tax slab.