What is Investment Interest?

I recently bought a bond for the first time ever, what I’d like to know is how does investment interest work and how can I start collecting?

Basically, you most likely bought your bonds in some type of brokerage or other financial account, if the bond is a bearer bond, which means that the bond was issued in your name, you simply hold the bond in the account and the interest payment will be made into that account.

If you bought a bond which is a “coupon bond”, then the interest payment will most likely be made two times a year and will be specified on the face of the bond which is redeemable for the entire principal amount at maturity.

Another type of bond you may have purchased is a “callable bond”.
This means that the issuer can “call” the bond and return your principal without paying the remainder of the interest. You would then be forced to reinvest your funds at a lower rate. Callable bonds usually get called when interest rates are dropping since it costs the issuer less to call the bond and refinance at a lower rate.

Investment interest can also be accrued in other types of accounts, for example a forex account will collect interest every day if you happen to be long a currency which carries a higher interest rate than the currency which you are short.

For example if you bought Australian dollars and sold Japanese Yen, then the interest rate in Australia would be paid to you, since the rate is higher than in Japan while you would have to pay out the prevailing interest rate in Japan for the short Japanese Yen which would be cancelled out by the interest received on the Australian Dollars. At the end of every trading day, a “rollover” is paid out or charged on all currency positions.
By InvestorGuide Staff

Copyrighted 2016. Content published with author's permission.

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