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Why Your Bonds May Not Be Paying What You Think
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When you buy a bond, you might expect that the amount of interest stated on the coupon is the amount of interest that you’ll be receiving. So if you have, say, a $10,000 bond paying 5 percent interest, you probably figure it will pay you $500 each year.
But that isn’t always the case. This is where it’s important to understand not just the bond’s current yield, but probably more importantly, the bond’s yield to maturity. There may be a difference between the bond’s present cash flow and what you’ll ultimately receive after all interest payments and the return of the principal.
Sound confusing? Let’s clear it up. Tune in to today’s episode of Managing Your Financial Future as podcast host Johnny Dean and “Professor” Rick Plum, CFP® tell you what you need to know before – and after – you purchase your bonds!
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