Bonds are paid in two primary ways: through periodic interest payments and the return of the bond's face value at maturity.
Here's a breakdown:
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Periodic Interest Payments (Coupon Payments): The issuer of the bond (e.g., a corporation or government) makes regular interest payments to the bondholder. These payments are typically made semi-annually (twice a year), but can also be made annually or quarterly, depending on the bond's terms. The interest rate is predetermined and stated as a percentage of the bond's face value (coupon rate). For example, a bond with a face value of $1,000 and a coupon rate of 5% will pay $50 in interest per year, usually split into two $25 payments.
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Face Value Repayment (Principal or Par Value): At the bond's maturity date (the date the bond comes due), the issuer repays the bondholder the face value (also called par value or principal) of the bond. This is the original amount the bondholder lent to the issuer. For example, if you bought a bond with a face value of $1,000, you will receive $1,000 back on the maturity date, in addition to any remaining interest payments.
In summary, when you buy a bond, you're essentially lending money to the issuer. They repay you through periodic interest payments over the life of the bond, and then they return the original loan amount (face value) when the bond matures. Unlike owning stock, bondholders don't have any ownership rights in the company or entity that issued the bond.
